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In a year when the markets have minted many new self-proclaimed geniuses, it is worth remembering the Dunning-Kruger Effect.
But what is the Dunning-Kruger Effect and how does it work?
Here's Dunning-Kruger Effect 101!
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1/ First, a few definitions.
The Dunning-Kruger Effect is a cognitive bias in which people with low ability at a given task are prone to overestimate their ability at that task.
Put simply, humans are notoriously incapable of objective evaluation of their competency levels.
2/ The cognitive bias was first identified by psychologists David Dunning and Justin Kruger in a 1999 study.
Their paper, entitled Unskilled and Unaware of It, summarized, "People tend to hold overly favorable views of their abilities in many social and intellectual domains."
Warren Buffett and Charlie Munger often reference the importance of knowing the boundaries of your circle of competence.
But what is a Circle of Competence and how does it work?
Here's Circle of Competence 101!
1/ First, a few definitions.
A Circle of Competence is the set of topic areas that align with a person's expertise.
If the entire world of information were to be expressed in a circle, an individual's Circle of Competence is the small sub-circle that represents their expertise.
2/ The idea surfaced in the 1996 BH annual letter.
"You don’t have to be an expert on every company...you only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital."
If you could spend a day with one person from history, who would it be and why?
Some amazing replies here. To clarify, the person can definitely still be alive!
Most frequent responses so far:
Business - Steve Jobs
World Leaders - Benjamin Franklin, Mandela, Napoleon
Religion - Jesus, Prophet Muhammad, Moses
Science/Math - Leonardo da Vinci, Tesla, Einstein
Sports/Culture - Muhammad Ali