Of all the cognitive errors in behavioral finance and human psychology, the one that creates the most confusion is the Dunning-Kruger effect. (Perhaps its rise in pop culture is to blame). Regardless, I find DKE to be an incredibly useful tool that helps explain many of the individual errors we see in investing.

It’s useful to think of Dunning Kruger in terms of metacognition: One’s ability to self-evaluate a particular skill set. Metacognition appears to be a discrete skill unto itself, one that unsurprisingly increases along with the underlying skill. As you improve at a thing, your ability to evaluate your skills at that thing also increases.

Note that “Unskilled and unaware of it” is more than mere overconfidence, hubris or incompetence; it’s a very specific way to describe not just an overestimation of skills, but a way to framing that helps us understand why that error occurs, and

Keep reading this article on Barry Ritholtz - The Big Picture.

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