The Dunning-Kruger Effect: Why Every Novice Thinks They Can Trade

dunning-kruger effect

dunning-kruger effectWhen it comes to the topic of my own trading, I’ve been in a bit of a funk lately. It seems like the more I learn about different types of trading, the more I realize that I have no idea what I’m doing. This has been going on for a few years now, any talking to experts on the DTAYS Podcast hasn’t helped me feel any better.

Therefore, I was hooked instantly when I saw a trading article that started with this quote:

A fool thinks himself to be wise, but a wise man knows himself to be a fool. – William Shakespeare

This is how a recent article from the guys at GestaltU starts. They continue by discussing popular trading comparisons like trying to be a surgeon on the weekend and how ridiculous that is.

Yet people from all walks of life think they can simply open up an eTrade account and compete successfully in markets against the top investment firms in the world. Somehow, subscribing to a few newsletters; soliciting tips from friends or taxi drivers; learning to draw trend-lines or interpret a MACD cross; or a few inconsistent hours a week or month reading the Wall Street Journal, the Economist, or watching CNBC, equips them to out-trade GETCO, Renaissance, and Goldman’s proprietary trading desk, with the best information, fastest computers, and most aggressive algorithms.

My ears perked up right away, and I instantly forgot about the chicken wings burning in the oven. That’s what I am doing. I’m that fool. Well…..at least I know enough to know I’m that foolish.

The article continues by explaining that this concept is actually called the Dunning-Kruger Effect:

At root, the DK effect explains the observation – ubiquitous across domains of expertise – whereby people who are less competent lack the requisite knowledge about the depth and breadth of the domain in question to recognize their own relative incompetence. Laypersons in any field simply don’t know enough about the complexities of that field to comprehend the magnitude of their knowledge gap.

Yep. That’s me.

They also provided us with some other great quotes around the subject:

Confucius stated, “Real knowledge is to know the extent of one’s ignorance.” In 1951 Bertrand Russell  asserted, “One of the painful things about our time is that those who feel certainty are stupid, and those with any imagination and understanding are filled with doubt and indecision.” Charles Darwin also weighed in on the topic with “ignorance more frequently begets confidence than does knowledge,” and even Shakespeare expressed similar sentiment in As You Like It: ”The Foole doth thinke he is wise, but the wiseman knowes himselfe to be a Foole.”

The article also explains that novices are much more likely to have passionate opinions. That is why they make better TV interviews.

What the article doesn’t do is explain how to bridge the gap from novice to expert. If I’m enough of a novice to begin to grasp how far I am away from an expert, how to I find the motivation to keep learning. The more I realize I don’t know, the more difficult it gets to keep pushing forward.

But then again, if it was easy, everyone would be doing it.