The Fun Behind the Dunning-Kruger Effect

In 1995, a man by the name of McArthur Wheeler thought of a brilliant idea: he was going to rob a bank. When he pulled up to the bank, he showed up with a gun and no mask and demanded the money. He then escaped, thinking he was going to get away with this plan. He was caught hours later. When he asked how they were able to identify him, they simply pointed to the fact that he wasn’t wearing a mask. Obviously, Wheeler was aware of that. What he wasn’t aware of was that he had thought that the lemon juice he had covered his face with would make him invisible to the cameras. Read that sentence again – this is not a joke. Because he had seen that lemon juice could be used as invisible ink, his thought process was that this could chemically transfer over to his face and make him invisible. Imagine the reaction from the officers who interrogated him.

Now had Mr. Wheeler actually done his research – and paid attention in chemistry class – he would have known that him covering his face in lemon juice was completely trivial. And yet, we see this concept all the time – we’re all guilty of it from time to time. This concept, known as the Dunning-Kruger Effect, occurs when people think their cognitive ability is greater than what it really is. This explains why the arrogant person you know talks about a topic they think they know more than anyone else.

What causes this effect? For the most part, it’s really a lack of self-awareness and metacognition – the ability for you to analyze your own thoughts. People who start learning something and think they know enough to proclaim themselves as ‘experts’ are really the ones who are blinded by this effect. The paradox behind this is that you don’t become aware of how little you know something until you’ve learned enough about it. When you have low self-awareness and you combine that with having a lower cognitive ability in a certain area, it leads you to believe you know more about something than you really do. The thing to note here is that this isn’t limited to just a certain group of people – almost everyone from every industry can become a victim.

When you start out as an investor of say stocks, and you buy a few shares of a stock that suddenly skyrockets in share price, you either tend to think beginner’s luck or you really know what you’re doing. For those in the latter mindset, that’s a dangerous game. Your ego starts to swell and you think you know more than you really do. You buy all kinds of stocks at all kinds of prices and then what the market shows you its true face, you’re left with a lot of questions and not a lot of money. It explains why people who have been in their sector for a long time don’t really get overconfident – they know what they don’t know and their confidence matches more realistic levels.

As a founder or venture capitalist, you have to really be aware of the Dunning-Kruger Effect. When you first start a company, it helps to always be paranoid. Knowing that market trends could change, who your competitors are, and whether you have a real product-market fit are all key indicators of whether a founder should know whether to pivot or continue to right the ship. Those who can’t see a clear vision and picture of what they’re trying to do are usually the ones who end up going bust. The same can be applied to VCs too. It’s why conducting due diligence is one of the most critical tasks and those who do it well last longer than other firms. Knowing your metrics, your sector, and the market will allow you to appropriately keep your ego in check when deciding who to invest in or what market to start a company in.

Chances are that you’ve been in a situation where you thought you knew more than you actually did. It’s not a bad thing initially, but improving your self-awareness and analyzing your thoughts as you go will help reduce your chances of being that person who knows more than they think. Whether you’re a startup founder, an investor, or anyone else, the message here is simple: never think you know more than you think.