1
00:00:00,160 --> 00:00:03,080
Speaker 1: Everybody wants to be a great investor. We love the

2
00:00:03,200 --> 00:00:06,400
Speaker 1: idea of outperforming the markets, or at the very least,

3
00:00:06,880 --> 00:00:11,200
Speaker 1: beating our peers. The problem with all this foolishness is

4
00:00:11,240 --> 00:00:14,160
Speaker 1: that nearly all of us lack the skill set and

5
00:00:14,360 --> 00:00:20,040
Speaker 1: discipline required to create those better than average returns. Worse yet,

6
00:00:20,200 --> 00:00:24,000
Speaker 1: we often fool ourselves into believing we are much more

7
00:00:24,079 --> 00:00:26,200
Speaker 1: skilled than we actually are.

8
00:00:28,040 --> 00:00:29,880
Speaker 2: We don't get a game.

9
00:00:31,560 --> 00:00:35,000
Speaker 1: I'm Barry Ridhelts, and on today's edition of At the Money,

10
00:00:35,400 --> 00:00:40,720
Speaker 1: we're going to discuss metacognition, our ability to self evaluate

11
00:00:41,120 --> 00:00:44,199
Speaker 1: our own skills. To help us unpack all of this

12
00:00:44,400 --> 00:00:47,559
Speaker 1: and what it means for your portfolio, let's bring in

13
00:00:47,600 --> 00:00:51,080
Speaker 1: Professor David Dunning of the University of Michigan. He is

14
00:00:51,120 --> 00:00:54,360
Speaker 1: the author of several books on the psychology of self

15
00:00:54,880 --> 00:00:58,760
Speaker 1: and best known for his research known as the Dunning

16
00:00:58,960 --> 00:01:03,360
Speaker 1: Kruger Effect. So welcome, Professor Dunning. Let's start with the basics.

17
00:01:03,680 --> 00:01:06,040
Speaker 1: What is the Dunning Kruger effect.

18
00:01:06,400 --> 00:01:10,240
Speaker 2: The Dunning Kruger effect is the basic idea that people

19
00:01:10,319 --> 00:01:15,440
Speaker 2: who lack expertise lack the very expertise they need. To

20
00:01:15,680 --> 00:01:21,039
Speaker 2: recognize the fact that they lack expertise, that is, if

21
00:01:21,080 --> 00:01:24,600
Speaker 2: you don't know, you don't know what you don't know.

22
00:01:25,360 --> 00:01:28,920
Speaker 2: And so the basic problem people have is they fail

23
00:01:28,959 --> 00:01:31,440
Speaker 2: to recognize their own ignorance when it comes to their

24
00:01:31,440 --> 00:01:35,600
Speaker 2: skill or if it comes to any particular decision that

25
00:01:35,600 --> 00:01:37,360
Speaker 2: they may have in front of them that day.

26
00:01:38,040 --> 00:01:43,480
Speaker 1: So it sounds like metacognition is a separate skill from

27
00:01:43,560 --> 00:01:46,920
Speaker 1: whatever fields we may be working in it. It could

28
00:01:46,920 --> 00:01:49,800
Speaker 1: be business, it could be financed, it could be sports.

29
00:01:50,440 --> 00:01:53,880
Speaker 1: The ability to self evaluate is its own ability.

30
00:01:55,040 --> 00:01:58,800
Speaker 2: Well, it certainly is its own task that we have

31
00:01:58,880 --> 00:02:01,280
Speaker 2: to come to a decision or at least some sort

32
00:02:01,280 --> 00:02:04,960
Speaker 2: of judgment, and then there's a second task of should

33
00:02:05,000 --> 00:02:08,239
Speaker 2: we be confident in that decision or should we have doubt?

34
00:02:08,800 --> 00:02:12,840
Speaker 2: And that's that second task, and often that's the important

35
00:02:12,840 --> 00:02:15,280
Speaker 2: one that determines whether or not we're going to act,

36
00:02:15,400 --> 00:02:19,000
Speaker 2: or whether we're going to seek advice or hedge or

37
00:02:19,080 --> 00:02:24,240
Speaker 2: seek insurance. And it does have some skills associated with it,

38
00:02:24,360 --> 00:02:29,440
Speaker 2: but often doing the second task well requires the same knowledge,

39
00:02:29,440 --> 00:02:32,840
Speaker 2: the same expertise as doing the first task well. And

40
00:02:33,080 --> 00:02:36,160
Speaker 2: that's where the dudding Kruger effect comes in. That's the paradox,

41
00:02:36,200 --> 00:02:40,000
Speaker 2: the conundrum, the issue, But it is a second task

42
00:02:40,080 --> 00:02:41,320
Speaker 2: that is very very important.

43
00:02:41,600 --> 00:02:44,960
Speaker 1: So if we are not expert in a given space,

44
00:02:45,680 --> 00:02:49,760
Speaker 1: it sounds like that implies we also lack the ability

45
00:02:49,919 --> 00:02:52,480
Speaker 1: to judge our own lack of expertise.

46
00:02:53,440 --> 00:02:55,120
Speaker 2: That's right. We have a as we call it, a

47
00:02:55,160 --> 00:02:59,040
Speaker 2: double burden. We lack the skills to make the correct

48
00:02:59,040 --> 00:03:02,120
Speaker 2: decision in the first place. That also means we don't

49
00:03:02,160 --> 00:03:04,640
Speaker 2: necessarily have the skills to be able to evaluate the

50
00:03:04,680 --> 00:03:05,720
Speaker 2: decisions that we've made.

51
00:03:05,880 --> 00:03:09,080
Speaker 1: So this seems to be a very common problem in

52
00:03:09,120 --> 00:03:13,720
Speaker 1: the field of investing. With newbies or people who are

53
00:03:13,800 --> 00:03:16,920
Speaker 1: early in their investment career, they have a little bit

54
00:03:16,960 --> 00:03:20,240
Speaker 1: of success, sometimes it's luck, maybe there's some skill involved

55
00:03:20,600 --> 00:03:24,239
Speaker 1: or some combination of both, but they develop a bit

56
00:03:24,240 --> 00:03:29,120
Speaker 1: of overconfidence and that allows them to forget about, Hey,

57
00:03:29,240 --> 00:03:32,920
Speaker 1: maybe I'm not an expert. How dangerous is this out

58
00:03:32,919 --> 00:03:34,040
Speaker 1: there in the world.

59
00:03:34,480 --> 00:03:37,000
Speaker 2: Well, it can be dangerous. One thing to point out

60
00:03:37,080 --> 00:03:40,640
Speaker 2: is that it's a danger for everybody, no matter what

61
00:03:40,760 --> 00:03:44,400
Speaker 2: your level of expertise is. As soon as you step

62
00:03:44,400 --> 00:03:48,240
Speaker 2: into your own pocket of incompetence, well you're vulnerable to

63
00:03:48,320 --> 00:03:52,119
Speaker 2: this effect. But if you're new to something, and you're

64
00:03:52,320 --> 00:03:55,840
Speaker 2: very vulnerable to this effect. If you're learning something if

65
00:03:55,840 --> 00:04:00,440
Speaker 2: you have a little experience. While your experience is valuable,

66
00:04:00,760 --> 00:04:04,840
Speaker 2: but you may overplay its value. You may overlearn what

67
00:04:04,960 --> 00:04:10,640
Speaker 2: you've learned from just a little bit of experience with something.

68
00:04:10,800 --> 00:04:12,760
Speaker 2: And I think you know things that actually turned out

69
00:04:12,760 --> 00:04:16,839
Speaker 2: to be luck or misteries the situation, and that could

70
00:04:17,480 --> 00:04:19,400
Speaker 2: leads you to fall prey to the Dunning Kruger effect.

71
00:04:19,600 --> 00:04:23,960
Speaker 1: So this sounds a little bit like overconfidence. How does

72
00:04:24,040 --> 00:04:27,919
Speaker 1: Dunning Kruger effect differ from just straight up having too

73
00:04:28,000 --> 00:04:29,480
Speaker 1: much belief in your own abilities?

74
00:04:30,400 --> 00:04:35,240
Speaker 2: Well, overconfidence is a general phenomenon and you can find

75
00:04:35,279 --> 00:04:39,320
Speaker 2: it everywhere. I would actually argue that overconfidence is inevitable.

76
00:04:39,800 --> 00:04:42,280
Speaker 2: In some sense, it's something that we're all going to experience,

77
00:04:42,320 --> 00:04:44,760
Speaker 2: and in a sense it's something that we all have

78
00:04:44,839 --> 00:04:49,039
Speaker 2: to manage. It's just an inevitable fact of life. What

79
00:04:49,120 --> 00:04:53,000
Speaker 2: the Dunn Kruger effect is is just one particular ingredient,

80
00:04:53,640 --> 00:04:58,680
Speaker 2: one spice that can lead people into overconfidence. That is,

81
00:04:59,000 --> 00:05:02,320
Speaker 2: when you are not an expert, when you're in a

82
00:05:02,360 --> 00:05:06,200
Speaker 2: situation that's new to you. This is exactly when you're

83
00:05:06,240 --> 00:05:10,279
Speaker 2: in a situation where you may become quite overconfident. You

84
00:05:10,320 --> 00:05:14,200
Speaker 2: may think that you've got this, when in fact you're

85
00:05:14,320 --> 00:05:18,040
Speaker 2: nowhere near having this if you will. It's one of

86
00:05:18,080 --> 00:05:22,760
Speaker 2: the situations where overconfidence maybe it's most pointed or it's

87
00:05:22,839 --> 00:05:23,440
Speaker 2: most severe.

88
00:05:23,680 --> 00:05:26,560
Speaker 1: So how should we think about our own blind spots?

89
00:05:26,800 --> 00:05:29,679
Speaker 1: What can we do to make ourselves more self aware

90
00:05:30,279 --> 00:05:32,960
Speaker 1: of the areas that we need some improvement in.

91
00:05:33,360 --> 00:05:35,039
Speaker 2: One of the things I keep thinking about is to

92
00:05:35,320 --> 00:05:39,839
Speaker 2: resurrect that old Apple slogan, Apple computer slogan of thing different,

93
00:05:40,040 --> 00:05:42,000
Speaker 2: to ask other people what they think and see if

94
00:05:42,000 --> 00:05:47,160
Speaker 2: they think something different, or do what the professions, being

95
00:05:47,160 --> 00:05:50,400
Speaker 2: a lawyer or being a doctor do. If you look

96
00:05:50,440 --> 00:05:54,880
Speaker 2: at the professions, they actually institutionalize thinking different. In the

97
00:05:54,880 --> 00:05:57,560
Speaker 2: American legal system, if you're a lawyer, you present your

98
00:05:57,680 --> 00:06:00,880
Speaker 2: case and there will be another law who is going

99
00:06:00,920 --> 00:06:04,000
Speaker 2: to think different from you. In fact, that lawyer is

100
00:06:04,000 --> 00:06:05,960
Speaker 2: going to think the opposite of you, and it's going

101
00:06:06,040 --> 00:06:09,520
Speaker 2: to poke holes in every single argument you make. They

102
00:06:09,560 --> 00:06:12,400
Speaker 2: will be thinking different. The idea in the legal systems,

103
00:06:12,400 --> 00:06:16,279
Speaker 2: the truth will come out of that competition between your

104
00:06:16,400 --> 00:06:21,600
Speaker 2: side and the other side. Doctors don't make diagnoses. They

105
00:06:21,640 --> 00:06:26,800
Speaker 2: do differential diagnoses. They don't consider what your problem medical

106
00:06:26,839 --> 00:06:30,000
Speaker 2: problem might be. They consider multiple medical problems and trying

107
00:06:30,000 --> 00:06:32,719
Speaker 2: to figure out what rules in this medical problem, what

108
00:06:32,839 --> 00:06:34,680
Speaker 2: rules out these other medical problems.

109
00:06:35,000 --> 00:06:40,400
Speaker 1: So poor performers generally overestimate their skill at performance because

110
00:06:40,600 --> 00:06:44,200
Speaker 1: their incompetence deprives them of the skills they need to

111
00:06:44,320 --> 00:06:49,440
Speaker 1: recognize that deficit. What else should we be doing to

112
00:06:49,640 --> 00:06:53,400
Speaker 1: avoiding those sort of problems you talked about speaking to

113
00:06:53,480 --> 00:06:57,039
Speaker 1: other people, we talk about thinking differently. What other options

114
00:06:57,040 --> 00:07:00,680
Speaker 1: do we have in our toolkit to avoid these mistakes?

115
00:07:01,279 --> 00:07:05,599
Speaker 2: Always be learning? That is the easiest way to avoid

116
00:07:05,680 --> 00:07:09,120
Speaker 2: the problems of incompetence is to become competent. Although that's

117
00:07:09,360 --> 00:07:11,960
Speaker 2: very easy conceptually. I know it's hard to do in reality,

118
00:07:12,520 --> 00:07:14,680
Speaker 2: but you can always become more competent if you will.

119
00:07:14,680 --> 00:07:17,600
Speaker 2: It can always be learning. One of the things I

120
00:07:17,680 --> 00:07:23,040
Speaker 2: tell my graduate students the way you want to feel

121
00:07:23,920 --> 00:07:25,640
Speaker 2: is if you take a look at something you've done

122
00:07:25,680 --> 00:07:28,600
Speaker 2: in the past, like some sort of research study you've

123
00:07:28,920 --> 00:07:33,239
Speaker 2: created or something you've written, is that you should always

124
00:07:33,280 --> 00:07:37,120
Speaker 2: feel vaguely embarrassed by it, that there are things you

125
00:07:38,480 --> 00:07:41,400
Speaker 2: wish you'd done differently. And if you feel that way,

126
00:07:41,560 --> 00:07:45,200
Speaker 2: that that's a very good feeling because that means you've grown.

127
00:07:45,760 --> 00:07:48,400
Speaker 2: If you're perfectly satisfied with it. I would be scared.

128
00:07:48,440 --> 00:07:53,080
Speaker 2: That means you haven't grown. And I myself am delighted

129
00:07:53,120 --> 00:07:58,160
Speaker 2: to say I continue to embarrass myself constantly all the time.

130
00:07:58,200 --> 00:08:02,960
Speaker 2: When I read myself, even in the recent past, I'm

131
00:08:03,000 --> 00:08:07,880
Speaker 2: delighted that I'm still an embarrassment. I wish it would end,

132
00:08:07,960 --> 00:08:10,000
Speaker 2: But then again, I wish it wouldn't end.

133
00:08:10,360 --> 00:08:14,760
Speaker 1: Huh. Quite fascinating. So to wrap up our inability to

134
00:08:14,840 --> 00:08:18,840
Speaker 1: evaluate our own skill sets, especially when we're first starting

135
00:08:18,840 --> 00:08:23,720
Speaker 1: out as investors, is a very troubling and potentially expensive

136
00:08:24,360 --> 00:08:29,240
Speaker 1: human trait. However, if we find ourselves mentors, if we're

137
00:08:29,280 --> 00:08:32,400
Speaker 1: always learning, if we look back at what we used

138
00:08:32,400 --> 00:08:35,680
Speaker 1: to do and recognize, hey, that's a little embarrassing, it

139
00:08:35,920 --> 00:08:39,040
Speaker 1: means that we've come a long way. As long as

140
00:08:39,120 --> 00:08:43,640
Speaker 1: we can objectively measure our performance, take steps to get better,

141
00:08:43,920 --> 00:08:47,480
Speaker 1: and try and stay within our own abilities, we can

142
00:08:47,600 --> 00:08:52,400
Speaker 1: have much better outcomes. I'm Barry Rudults. This is Bloomberg's

143
00:08:52,720 --> 00:08:53,400
Speaker 1: at the Money.

144
00:08:54,880 --> 00:09:05,199
Speaker 2: We don't get proved again. A