"Everyone is a genius in a bull market."

A breakdown on the dangerous Dunning-Kruger Effect:
In an era when the markets have minted many new self-proclaimed geniuses, the Dunning-Kruger Effect is more relevant than ever.

This thread provides a breakdown of the famed cognitive bias, where we see it most frequently, and a few strategies for avoiding it...
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.
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."
The two men had studied the bizarre case of McArthur Wheeler, a 5'6" 270lb bank robber who was swiftly caught after robbing two banks in broad daylight.

He hadn't worn a mask.

Instead, he had put lemon juice on his face, believing it would make him invisible to cameras.
Wheeler was aware that lemon juice was used as invisible ink—so (incorrectly!) inferred that it could be used to make himself invisible to security cameras.

Even after he was caught, he was legitimately incredulous that his plan with the lemon juice hadn't worked.
Dunning and Kruger studied whether the least skilled are the most overconfident.

Their finding: the worst performers consistently overestimated their abilities relative to others.

Let's look at a few examples of this bias in action and how you can avoid its pitfalls...

As @mcuban says, "Everyone is a genius in a bull market."

When markets are ripping and your portfolio seems to grow by the day, many fall victim to the Dunning-Kruger Effect.

We may wrongly attribute this performance to our innate talent as investors.
Politics & Policy

With politics, intellectual humility is an aberration, not the norm.

Politicians espouse policy ideas with great confidence even if they have a weak handle of the details.

It's not shocking that we see Cobra Effects constantly in the policymaking realm...

Everyone has had that one boss—the know-it-all who actually knows very little.

These bosses and managers hold back organizations from high performance.

They are easy to spot—we all know who they are.

Beware this boss!
But while we can all pile on against the investors, politicians, bosses, or public figures who seem to epitomize the Dunning-Kruger Effect, it is important to recognize that, as humans, we are all prone to this cognitive bias.

So how do we avoid it?

Here are a few strategies:
Identify your Circle of Competence

The Circle of Competence is the set of topic areas that align with a person's expertise.

Be ruthless in identifying and protecting the boundaries of your Circle of Competence.

Hint: it's usually smaller than you think.
Get Comfortable With "I Don't Know"

Most people have an inherent discomfort with saying "I don't know."

Change that. Embrace what you don't know.

The world would be a much better, more efficient place if everyone were more willing to admit the gaps in their knowledge.
Challenge Yourself

Consistently challenge your belief on your own competency ratings.

Do you actually know something as well as you think you do?

Do you truly understand it from a first principles perspective?

Can you explain it to a 5-year-old?

Be ruthlessly honest.
As Charlie Munger said, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Know your competencies, focus on them.

Know your incompetencies, avoid (or outsource) them.
The Dunning-Kruger Effect is dangerous.

"It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so."

So the next time you begin marveling at your skill at a task, remember what you just learned and the strategies for avoiding it…
Follow me @SahilBloom for more threads on business, finance, and decision-making.

I do deep-dives on these topics every single week in my newsletter. Join the 42,000+ others and subscribe today. sahilbloom.substack.com
And for more on the Dunning-Kruger Effect, I highly-recommend the sources below:




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More from @SahilBloom

30 Oct
How to find (and operate in) your Zone of Genius:
A few weeks ago, I shared a thread—How to Win (without talent or luck)—that got a lot of attention.

One of the most popular insights I shared was the idea of operating in your Zone of Genius.

But I got a lot of questions about how to practically achieve that...
Your Zone of Genius is where your interests, passions and skills align.

Operating in it means you stop playing *their* games and start playing *yours*.

This thread shares my framework—built through personal struggle—for finding and operating in your Zone of Genius:
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26 Oct
10 threads to accelerate your career:
How to Win (without talent or luck)

20+ principles compiled from the most impressive leaders and thinkers in the world.
20 Ways to Stand Out in a Hiring Process (that don’t involve your resume)

You can stand out without fancy degrees or credentials—learn how.
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24 Oct
One cold email can change your life.

Here's how to write a great one:
I’ve sent (and received) a lot of cold emails—some great, some not.

What I've learned: a cold email success is never an accident.

The features of a great cold email:
• Short & Sweet
• Personalized
• Credentials or Social Proof
• Create Value
• Clear CTA

Let's cover each:
Short & Sweet

If you're sending a cold email to someone, remember that the person receiving it probably gets a lot of these.

They don't have time (or energy) to read through long and winding notes.

Keep it short and sweet.

Space out the text to make it optically inviting.
Read 17 tweets
16 Oct
How to Win (without talent or luck):
Operate in Your Zone of Genius

Your Zone of Genius is where your interests, passions and skills align.

Operating in your Zone of Genius means playing games you are uniquely well-suited to win.

Once you identify it, you can stop playing *their* games and start playing *yours*.
Adopt a Positive Sum Mentality

Want to get ahead in life? Start genuinely rooting for others to succeed.

When one of us wins, we all win—winning spreads.

If you adopt that mentality, you’ll become a magnet for the highest quality people.
Read 26 tweets
14 Oct
5 threads to get you up to speed on the global economy:
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13 Oct
Stagflation is the economic risk that everyone is going to be talking about in the days and weeks ahead.

Here's a simple breakdown on the topic:
1/ There's a lot of talk right now about the risks of stagflation.

@Business published an article titled "Stagflation Is All Anyone in Markets Wants to Talk About Now"—it's serious.

This thread provides a simple framework for understanding stagflation and our current situation:
2/ Stagflation is pretty scary.

The "stag" refers to economic stagnation—low growth and high unemployment.

The "flation" refers to inflation.

Putting it together, "stagflation" is an economic condition defined by the presence of low growth, high unemployment, and inflation.
Read 18 tweets

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