Newswire

The Dunning-Kruger Effect for Advisors

A little over 20 years ago, two academics from Cornell, David Dunning and Justin Kruger, released groundbreaking research which showed something that many people had long suspected.  This was simultaneously earth-shattering news and non-news, depending on where you stood.

To whit, some people are simply too incompetent to recognize their own incompetence.  The phrase, “you don’t know what you don’t know because you don’t know what you don’t know” had been used extensively before their seminal paper was released.  So was “a little knowledge is a dangerous thing”.

The paper was simultaneously earth-shattering news and non-news, depending on where you stood.   While the verified results showed that the thesis was, in fact, true, the way it landed on people depended on several factors – including the innate level of cynicism they might have.  Cynics and relatively self-aware people tend to receive the research with a collective, “well, duh” while other, more measured, but less self-aware people sometimes reacted with incredulity.   Either way, like it or not, the evidence is clear.  Awkward, maybe… politically incorrect in the eyes of some… but clear.

If you think you’re good at something, but below average at it, it can be difficult to accept your relative (or even absolute) incompetence.  Study after study has shown how we all suffer from various forms of overconfidence.  Way over half the population considers themselves to be above-average drivers, for instance.  Ironically, many who are among the best at what they do tend to underestimate their abilities.

Very few people recognize themselves in the research, as you might imagine.  That’s because people who are low performers are not only relatively poor at accepting criticism, they also seldom show an interest in self-improvement.   In the words of Charles Darwin: “ignorance more frequently begets confidence than does knowledge”.   This is a challenge for all of us.

While I don’t reference the Dunning-Kruger Effect explicitly in my book STANDUP to the Financial Services Industry, it would be obvious to anyone who has read it that Dunning and Kruger would opine that many mutual fund advisors (the people who were studied in a paper entitled “The Misguided Beliefs of Financial Advisors”) suffer from this affliction.  The “Misguided Beliefs” paper provides copious evidence that some registrants chase past performance, run concentrated positions and pay little or no attention to product cost.   Whether they realize it or not, many of the advisors in the “Misguided Beliefs” study suffer from the Dunning-Kruger Effect.  The challenge for society is to find a way to respectfully, but purposefully get advisors to recognize that they’re not as good at what they do as they thought… and to up their game as a result.

Share on linkedin
Share on facebook
Share on twitter
Share on print
Share on email

Recent Posts

The information contained herein has been provided for information purposes only.  The information has been drawn from sources believed to be reliable.  Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future performance of any investment.  The information does not provide financial, legal, tax or investment advice.  Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.  This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document.  Wellington-Altus Private Wealth Inc. (WAPW) does not guarantee the accuracy or completeness of the information contained herein, nor does WAPW assume any liability for any loss that may result from the reliance by any person upon any such information or opinions.  Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.  WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.