I have been known to say, on more than one occasion, in philosophical conversations with friends, or when lecturing to a group of financial modelling trainees – “the worst place to be in life is not to know what you don’t know – it’s much better to know what you don’t know”.
Because then you can do something about it.
As it turns out, I could have been talking to myself.
The truth is, my profound utterances are actually known – by the enlightened – and are a form of the ‘Dunning Kruger Effect’ – and have been the subject of significant research.
And hence the title of this article. I didn’t know what I didn’t know! – and so I am eating humble pie. Happily!
The Dunning-Kruger effect is a type of cognitive bias in which people believe that they are smarter and more capable than they really are.
The term lends a scientific name and explanation to a problem that many people immediately recognize—that fools are blind to their own foolishness. As Charles Darwin wrote in his book The Descent of Man, “Ignorance more frequently begets confidence than does knowledge.”
This phenomenon is something you have likely experienced in real life, perhaps around the dinner table at a holiday family gathering.
Throughout the course of the meal, a member of your extended family begins spouting off on a topic at length, boldly proclaiming that he is correct and that everyone else’s opinion is stupid, uninformed, and just plain wrong.
It may be plainly evident to everyone in the room that this person has no idea what he is talking about, yet he prattles on, blithely oblivious to his own ignorance.
The effect is named after researchers David Dunning and Justin Kruger, the two social psychologists who first described it.
So how do we solve the problem?
Dunning and Kruger suggest that as experience with a subject or topic increases, confidence typically declines to more realistic levels.
As people learn more about the topic of interest, they begin to recognize their own lack of knowledge and ability.
Then as people gain more information and actually become experts on a topic, their confidence levels begin to improve once again.
The question is – what can you do to gain a more realistic assessment of your own abilities in a particular area if you are not sure you can trust your own self-assessments?
Keep learning and practicing. Instead of assuming you know all there is to know about a subject, keep digging deeper. Once you gain greater knowledge of a topic, the more likely you are to recognize how much there is still to learn. This can combat the tendency to assume you’re an expert, even if you’re not.
Ask other people how you’re doing. Another effective strategy involves asking others for constructive criticism. While it can sometimes be difficult to hear, such feedback can provide valuable insights into how others perceive your abilities.
Question what you know and what you don’t know. Even as you learn more and get feedback, it can be easy to only pay attention to things that confirm what you think you already know. This is an example of another type of psychological bias known as the confirmation bias. In order to minimize this tendency, keep challenging your beliefs and expectations. Seek out information that challenges your ideas.
So, what is the significance of this learned discourse?
Well, as some of you may know I am passionate about financial modelling and the way in which effective flexible financial models can be significant predictive tools for company and business executives.
Ironically, whilst I have never been challenged about my view – my belief – I am still amazed about the relative lack – or absence – of financial models in the corporate world.
Of course, this lack of models may simply be a case of disbelief, or a lack of conviction about the benefits or disagreement with my opinion – or perhaps it’s really a question of knowledge or a lack of the necessary skills to build an effective model.
Having spent some 50 years in corporate management, my belief and passion about financial modelling stems directly from my own personal experiences. I can truly say that I know the benefits of financial models.
In this complex business environment, subject to rapid changes and a multiplicity of challenges, having a pertinent, applicable predictive tool to assist in evaluating and quantifying strategy, to allow “what-if” analysis and facilitate informed decisions is the next best thing to a crystal ball.
Ask anyone who has one if they would like to operate without it.