dunning-kruger-effect

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 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 they impacted 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 on 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’s 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 assumptions will at worst come away better equipped to improve themselves and their processes.

Dunning-Kruger vs. Imposter Syndrome

imposter-syndrome
Imposter Syndrome is a feeling of extreme self-doubt which leads to paralysis in decision-making. In short, the person feeling like an “imposter” will not be able to perform her/his duties due to a feeling of inappropriateness.

The opposite of the Dunning-Kruger effect is the imposter syndrome or the complete feeling of inadequateness in front of a specific situation.

Opposite of the Dunning-Kruger effect, which might lead to overconfidence and taking too many risks for the adequate competence that a person has.

Imposter Syndrome might lead to the paralysis of that person, even if she/he has the competence and knowledge to face it.

In short, the Imposter Syndrome is the other side of the coin of the Dunning-Kruger effect!

Dunning-Kruger effect examples

Here are some more examples of the Dunning-Kruger effect in action.

Leadership

Earlier we noted that the effect caused some individuals to believe their performance was superior to others when the opposite was true.

This tends to be most associated with one or two employees in a work environment who believe they are better than everyone else.

However, the effect can also impact leadership and cause those in senior positions to misjudge employee performance or their ability to lead.

Indeed, in a University of Nebraska study, it was found that 68% of the faculty rated themselves in the top 25% in terms of teaching ability while 90% believed their ability was above average.

These mathematical impossibilities demonstrate the power and prevalence of the Dunning-Kruger effect.

Consumer finance

Consumers also tend to overestimate their financial nous and ignore obvious discrepancies between their actual and perceived financial performance.

In a National Financial Capability Study conducted in 2012, the United States Treasury found that 23% of the 25,000 participants were recently declared bankrupts who believed they possessed superior financial knowledge.

Productivity

The Dunning-Kruger effect also impacts employee productivity. Some individuals create daily task lists that are beyond their capabilities and cannot possibly be completed in a single day.

This is caused by the employee overestimating their abilities with a general belief that they need less time to finish their tasks than they actually do.

Productivity then decreases as they become disheartened and overwhelmed by their perceived predicament.

Emotional intelligence

Various studies have also investigated the link between emotional intelligence and the Dunning-Kruger effect.

In a 2013 study published in the Journal of Applied Psychology, Dunning together with Oliver J. Sheldon and Daniel R. Ames analyzed emotional intelligence across three studies involving professional students.

The researchers found that the least-skilled students had limited knowledge of deficits in their performance.

They were also the most likely to criticize the accuracy or relevance of feedback that could help them improve.

The top performers in the studies were the individuals most motivated to improve their emotional intelligence after receiving feedback.

Humour, logical reasoning, and English grammar

Dunning’s original study in 1999 focused on 84 Cornell University students and how they perceived their abilities in humor, logical reasoning, and English grammar.

To assess grammar ability, for example, the students completed a test to assess their knowledge of American Standard Written English (AWSE). Those who scored lowest tended to overestimate their ability to use grammar correctly.

They also overestimated their final test score.

On the other hand, those who scored the highest in the grammar test tended to underestimate their ability and test score.

These results, as we have learned in the prior examples, have been replicated many times over subsequent years.

Key takeaways

  • The Dunning-Kruger Effect describes the phenomenon in which low competence individuals or businesses cannot recognize such incompetence.
  • A core component of the Dunning-Kruger effect is meta-ignorance, 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.

Connected Business Concepts

Barbell Strategy

barbell-strategy
A Barbell strategy consists of making sure that 90% of your capital is safe, and using the remaining 10%, or on risky investments. Applied to business strategy, this means having a binary approach. On the one hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix.

Technological Modeling

technological-modeling
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Heuristics

heuristic
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Bounded Rationality

bounded-rationality
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Second-Order Thinking

second-order-thinking
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

lateral-thinking
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Moonshot Thinking

moonshot-thinking
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Biases

biases
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Dunning-Kruger Effect

dunning-kruger-effect
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.

Occam’s Razor

occams-razor
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

mandela-effect
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger

Read Next: HeuristicsBiases.

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