What is the Dunning-Kruger Effect

Did you know? The Dunning-Kruger effect can impact financial decision-making, leading to overconfidence in one's financial knowledge. This cognitive bias can result in unwise or overly risky investment decisions.

The Dunning-Kruger effect is a cognitive bias where people with limited knowledge or competence in a particular intellectual or social domain tend to overestimate their own knowledge or competence in that domain. This phenomenon is named after psychologists David Dunning and Justin Kruger, who first described it in their 1999 research.

The effect is explained by the fact that the metacognitive ability to recognize one's own deficiencies in knowledge or competence requires a certain level of the same kind of knowledge or competence, which those who exhibit the effect have not attained. This lack of awareness of their own incompetence leads them to assume they are not deficient, often choosing what they believe is the most reasonable and optimal option.

The Dunning-Kruger effect is familiar from ordinary life and has been recognized in various forms throughout history. It is often seen in common sayings such as "A little knowledge is a dangerous thing" and in observations by writers and wits through the ages.

Research has shown that, compared to their more competent peers, incompetent individuals dramatically overestimate their ability and performance relative to objective criteria. They are also less able to recognize competence in themselves and others and less able to gain insight into their true level of performance by comparing it with others. Paradoxically, as these individuals become more competent, they gain the metacognitive skills necessary to realize their own incompetence, thus improving their ability to accurately assess their abilities.

As experts in financial planning, we at The Steele Group are here to help you navigate your financial journey with confidence and expertise.