Luck versus skill (FIGJAM)
Too many of us have a natural tendency to believe that we’ve achieved everything through our own hard graft.
It’s all too easy to downplay the fortunate aspects of our circumstances (in my case, for example, being born in a developed country, to well-educated parents, who ensured that I had a good schooling).
And then there’s been Australia’s 30-year economic tailwind; what a time to have been alive!
Dunning-Kruger in action
The Dunning-Kruger effect is a cognitive bias within which people fail to recognise that their abilities ain’t quite what they believe ’em to be.
The term is often used pejoratively, yet internal illusions can impact us all to some extent (yep, even the best of us!).
This illusory superiority can have surprisingly far-reaching consequences.
Most people think they’re better drivers than average, for example, which by definition cannot be so.
And we’ve probably all experienced co-workers with an unreliably upbeat view of their own skills.
Even US Presidents might believe they’re great at business and politics…despite facing a seething mass of evidence to the contrary.
True experts in their field, on the other hand, are knowledgeable enough to recognise what they don’t know, and position themselves accordingly.
Better lucky than smart?
All of this can be highly relevant to investing and the journey of building wealth, wherein a little bit of knowledge can be dangerous.
Unfortunately, it’s common to attribute lucky outcomes to skill, and conflating talent with fortune can be fraught with peril.
Another risk is the misapprehension that a high level of skill in an unrelated field (e.g. a technical expertise in brain surgery) must instantly translate to a mastery of markets.
There are known unknowns…
We may not be as smart as we think we are, then, but here are 4 ways to overcome the curse of the Dunning-Kruger effect:
(i) be conscious at the outset – when embarking upon a new subject or venture, be aware that you’re prone to a lack of knowledge and/or early over-confidence;
(ii) always be learning – a perennially advantageous trait, which tends to act as a safeguard against complacency;
(iii) slow & steady wins the race – decisions made in haste can be more likely to result in jeopardy; and
(iv) know when to strike – caution is warranted in business and investing. But as long as you’re carefully prepared, when a golden opportunity arises, don’t die wondering!
Stephen Hawking said that the greatest enemy of knowledge is not ignorance, but the illusion of knowledge.
In other words, we should try to to be self-aware enough to recognise our own incompetencies!