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Success Bias; Dunning-Kruger; Luck & Self-Awareness

A woman personifying the Dunning-Kruger effect as she kicks back with her black heels on the table and reads about her record-breaking successes on an smart phone.

MY DOG STEVE HOSTS SEMINARS

My dog Steve breaks records every month, as he eats more dog food than ever before every month.

The problem is that it makes him super cocky, and he now hosts seminars to tell other dogs how to eat more food.

The neighbor’s dog, Buttercup, is on to him though, as she knows that the only reason Steve breaks records every month is b/c he’s only 9 months old and simply growing.

As a confident woman, Buttercup has no problem telling Steve this, but Steve doesn’t care and continues to flaunt his records.

(You can see a photo of Steve breaking records at the bottom of this blog.)

STEVE = MORTGAGE COMPANIES

There is a point to this story and it is this: Steve is no different than all of the mortgage companies bragging loudly about their record-breaking 2020.

We ALL broke records last year simply b/c rates fell so sharply that it made it very easy for us all to sell “free money” (no cost refis).

Bragging about record volume in this market is like bragging about falling down on a steep hill and rolling to the bottom.

STOCK MARKET INVESTORS TOO (“you buy stocks, wait for them to go up and then sell them…”)

I see this same phenomenon with stock market investors who are also supremely confident in their skills, even though many of them are just riding a Fed-infused appreciation wave that will likely correct fairly brutally at some point.

I was listening to this Jolly Swagman Podcast recently with a former central banker, and he was literally terrified by the Robinhood app and the Dunning-Kruger effect it is fostering.

As most people know, the Robinhood app has made it very easy for the “little guy” to trade in stocks, and during the pandemic all too many “little guys” have plunged into the market and have been extremely fortunate.

Last week, I saw this video on Twitter (that inspired this blog) that showed two young stock traders explaining how to get rich like this… “you buy stocks, wait for them to go up and then sell them…” (what can go wrong?).

NYU Professor Scott Galloway explains the Dunning-Kruger effect like this: “The Dunning-Kruger effect posits that dumb people are too stupid to know they are dumb. They are not perplexed by difficult situations but overconfident — not knowing what they don’t know. As few people believe they are stupid, or a bad driver, a more relatable component of Dunning-Kruger is incorrectly believing one area of skill translates to another.”

Galloway’s example of Dunning Kruger is SoftBank, the company that funded WeWork and many other tech players that went bust. They got very cocky b/c they got extremely lucky with a $20 million Alibaba investment that turned into $100 billion, but that luck did not carry over to other investments.

SO WHY BLOG ABOUT THIS?

Three reasons:

  1. Self-awareness: We all suffer from Dunning-Kruger at times, and this is a great reminder to check ourselves before making any bad or major decisions. It is also a reminder that powerful self-awareness is the best way to fend off Dunning Kruger, and that overconfidence usually fosters brutal downfalls.In this summary of Dr. Tash Eurich’s book Insight: Why We’re Not as Self-Aware as We Think, and How Seeing Ourselves Clearly Helps Us Succeed at Work and in Life, the author reminds us that self-awareness is often the primary key to success as well. The keys to self-awareness include constant learning, a willingness to change long-held beliefs, and a willingness to garner and accept frank feedback from friends and colleagues.
  2. Don’t listen to “lucky” experts: There are all too many “experts” (like the young stock traders referenced above) who are sharing their expertise even though they were little more than extremely lucky. I see this constantly in the mortgage and real estate industries. Almost everything worked for all of us last year, but I suspect very few of those “success recipes” will work when the market turns, and it will.
  3. I just wanted to blog about Steve. 😊

STEVE BREAKING RECORDS

Steve might be suffering from the Dunning-Kruger effect as he relaxes after breaking records.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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