What Is The Dunning-Kruger effect In Business

The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Understanding the Dunning-Kruger effect

The Dunning-Kruger effect was first coined by psychologists David Dunning and Justin Kruger in 1999. They argued that the scope of a person’s ignorance is often invisible to them – particularly in fields where they are underqualified. Dunning and Kruger called this meta-ignorance, or ignorance of ignorance, which can lead to individuals overestimating their abilities.

This ignorance also extends to other people. A person who is ignorant of their own shortcomings may simultaneously believe their ability is superior to others. This is in direct contrast to a person with true ability in their chosen field. With increased knowledge, they are humbled by how much they are yet to learn. Indeed, the only way that an ignorant person will acknowledge their lack of ability is when they are alerted to the fact through education.

The Dunning-Kruger effect in business

The Dunning-Kruger effect can also affect businesses, particularly when new products or concepts are introduced into the market. For example, the introduction of digital currency and blockchain technology resulted in the rapid formation of many new entrepreneurial companies. Unfortunately, many lacked the required knowledge and awareness to understand their mistakes before it impacted on their viability.

This initial overconfidence can also affect businesses that are unwilling to take the educated advice of other professionals. Legal representation, accounting, and financial planning are tasks that some businesses attempt to save money or because they genuinely believe they have the required skills. Of course, the consequences of doing so are often financially disastrous.

Addressing the Dunning-Kruger effect in practice

Since individuals and businesses are largely ignorant of the Dunning-Kruger effect, it can be helpful to pause and reflect during day-to-day decision making. The following points may help stop the effect before it inflicts further damage.

  1. Evaluate all company processes critically. In other words, is there a better, more efficient, or more economical way of doing things? Would a change in supply chain management yield higher profits? What about a change in payroll systems?
  2. Consider workplace culture. Managers should put themselves in their employee’s shoes and assess what kind of leadership they provide. Are they approachable, reasonable, fair, and open to solving problems? Would a leadership course broaden their leadership skills?
  3. Evaluate the business to consumer relationship. Businesses should ask themselves what they are like to work with from the customer perspective. Is online and offline communication professional and attentive? Does the business listen to and implement customer recommendations?

Ultimately, the Dunning-Kruger effect can be overcome with humility and critical thinking. Businesses and individuals who challenge their own assumptions will at worst come away better equipped to improve themselves and their processes.

Key takeaways:

  • The Dunning-Kruger Effect describes the phenomenon in which low competence individuals or businesses lack the ability to recognize such incompetence.
  • A core component of the Dunning-Kruger effect is metaignorance, or ignorance of one’s ignorance. This leads to an overestimation of ability and in some cases, an underestimation of the abilities of others.
  • Critical thinking with the goal of improving is the best way to overcome the Dunning-Kruger effect.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here