Dunning-Kruger Effect

Here’s my best attempt at a two-sentence summary of the Dunning-Kruger Effect (DKE):

People with limited competence in a given field tend to overestimate their abilities. But as their skills improve, so does their ability to accurately assess those skills.

Put another way: you’re too dumb to know how dumb you are, but once you get smarter, you’ll realize how dumb you were.

Here’s a chart from Wikipedia that explains the DKE:

I’m bringing this up for two reasons: first, because of how badly I fell victim to the DKE early in my career, and second, because of the rise of AI technology.

My first two jobs in finance weren’t client-facing, and thank goodness for that. My call centre colleagues and I would sit around, confidently talking about how pathetic it was that barely anyone in finance saw the Great Financial Crisis coming. We were certain the worst was yet to come, and we laughed at our bosses, who had decades more experience, insisting they didn’t have a clue. They kept telling us to buy U.S. equities and Canadian banks as if our lives depended on it. “Sure, things might get worse before they get better,” they said, “but you’re young and can handle the volatility.”

As if. The Greater Financial Crisis was clearly on its way (it wasn’t).

Nearly every lunch break, we’d pull up fund performance charts and say things like, “Why didn’t people just invest in this fund during these years when returns were amazing, then sell when it was obviously going to take it on the chin, and move into this other one that was destined to do well?” I’m pretty sure we actually used the word destined.

Looking back, we were firmly planted on Mount Stupid.

We should have listened to the people with experience. Instead, we piled into speculative investments that “do well in a crisis” while fantasizing about shorting stocks, convinced that once the market collapsed, we’d be proven brilliant.

It turns out we were actually at the start of one of the greatest bull markets in recent history.

Thankfully, I had a few mentors early in my client-facing days who shoved me into the Valley of Despair and reminded me of the power of stocks. They know who they are, and I’m glad they eventually got me onto the Slope of Enlightenment.

Which brings me to AI.

AI technology in its current form is a powerful tool. I use it often, and I find it helpful, but I still double-check what it tells me with good old Google.

A client forwarded this podcast last week. I’ve listened to it twice now, but the forty-five second teaser sums it up well.

Let’s say you have a fight with your spouse. You want to do the right thing, so you go to ChatGPT and write, “This is exactly what happened… tell me what to do.”

You then go to your spouse and say, “Babe, I want you to know. I take full accountability. I care about this relationship…”

And your spouse asks, “Did you get this answer from ChatGPT?”

What are you going to do?

It made me laugh, but it also made me pause. AI is pushing people up Mount Stupid faster than anything I’ve ever seen, but it makes us feel like we’re already on the Plateau of Sustainability.

Humility matters, and it matters a lot. Whether you’re investing, tax planning, coding, or trying to figure out what’s wrong with your pet, expertise matters. Don’t confuse confidence for competence. I’ve done it myself. Many times.

The best advisors, mentors, and peers don’t pretend to have all the answers. What they offer is perspective. The kind that helps you stay grounded when everything else is pushing you toward instant certainty.

I can’t believe I’m ending with a Shakespeare quote, but here it is: “The fool doth think he is wise, but the wise man knows himself to be a fool.” That’s from As You Like It. I wonder what ChatGPT thinks?