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.
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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.
What causes the Dunning-Kruger effect?
The Dunning-Kruger effect is caused by a complex (and at times unknown) combination of cognitive biases and psychological factors. One of the primary factors is a lack of metacognition, which as we touched on earlier is the ability to reflect on one’s own thinking and understanding.
Individuals impacted by the Dunning-Kruger effect often lack this ability and are therefore unable to assess their level of competence with any reasonable accuracy.
Illusory superiority
Illusory superiority is a cognitive bias where individuals overestimate their abilities and skills compared to others. This bias can occur in various domains related to business such as intelligence, creativity, and social skills.
Much like the Dunning-Kruger effect, research has shown that illusory superiority tends to be more pronounced in areas where people lack expertise or knowledge.
This leads to overconfidence and incorrect assumptions that can impact everything from performance evaluations and team dynamics to decision-making.
To avoid illusory superiority, the individual must cultivate self-awareness and make a habit of seeking input from others. These practices help to challenge assumptions, identify blind spots, broaden one’s knowledge and expertise, and make more informed decisions.
Role specialization
Specialization refers to a narrow focus on a specific area of expertise which leads to a deep understanding of that particular domain.
Role specialization has increased in recent years because of advances in technology and more competitive markets.
Specialized businesses also realize several important benefits. They can provide their target market with a superior value proposition, tend to be perceived as authorities, and are better able to benefit from word-of-mouth marketing.
However, specialization by its very nature can lead to a lack of knowledge or awareness of other areas not within the individual’s expertise. This can cause the Dunning-Kruger effect since individuals overestimate their knowledge in areas outside their specialization.
In business and entrepreneurship, there are many examples of those who tried to transfer their success in one venture into another, unrelated industry. Some examples are provided later in this article.
Incentivization
Like role specialization, incentivization in the workplace has numerous benefits for employee motivation and organizational productivity.
However, it can also cause the Dunning-Kruger effect when incentive structures reward individuals without regard for the quality or accuracy of their work.
In this case, employees may be motivated to cut corners, ignore feedback, or overlook important information to facilitate personal gain.
The effect is also present when employees are rewarded for self-promotion or perceived expertise (rather than actual knowledge or skill).
Irrespective of whether such promotions are conscious or sub-conscious, employees in this context tend to overestimate their actual skill level when desirable awards are attached to it.
When employees are challenged on their ability – such as in a performance review – most defend what they perceive their ability to be and dismiss or reframe negative feedback to suit a particular worldview.
For example, when confronted with poor sales performance, an employee in a well-paid sales role may argue that their clients are unusually difficult to convince.
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.
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?
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.
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?
Leadership skills are the strengths and abilities individuals demonstrate to manage and motivate others toward achieving organizational goals.
Evaluate the business-to-consumer relationship
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.
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.
In the Amazon Shareholders’ Letter for 2018, Jeff Bezos analyzed the Amazon business model, and it also focused on a few key lessons that Amazon as a company has learned over the years. These lessons are fundamental for any entrepreneur, of small or large organization to understand the pitfalls to avoid to run a successful company!
Dunning-Kruger vs. 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 vs. Confirmation Bias
Both the Dunning-Kruger Effect and Confirmation bias are pervasive biases, yet fundamentally different.
Indeed, where the Dunning-Kruger Effect is the phenomenon where individuals with few skills overestimate their ability at a certain task.
Confirmation bias is a tendency to look for confirmatory information, which, rather than disproves, confirms our own beliefs, thus leading to all sorts of misjudgment in the real world.
This can be the effect of various tendencies.
For instance, selective exposure looks at information that confirms one’s beliefs, thus leading to confirmation bias.
Looking at the past by only selecting the information that confirms our own beliefs through hindsight bias also leads to confirmation bias.
Or yet, a self-serving bias where a person attributes success to her/his own personal abilities rather than a combination of personal ability, context, and lunch, leading to confirmation bias.
And lastly, a phenomenon (pervasive in social media) where the fact that we get most of the information from our social network creates powerful filter bubbles, thus possibly amplifying group polarization. As each group will confirm its own belief system by sharing and interpreting information in this same way.
That might lead to monoculture, lack of diversity, conspiracy theories, and more!
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.
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.
Dunning-Kruger effect in Entrepreneurship
In the context of entrepreneurship, the Dunning-Kruger effect is a cognitive bias that relates to overconfidence on the part of the founder(s).
This stems from the individual believing they know more about the industry, market, or business than they actually do.
What’s more, the most optimistic entrepreneurs wrongly assert that they have foreseen all the risks and other difficulties ahead of time.
With almost two decades of experience mentoring start-ups, Steven Inke believes the “Dunning-Kruger effect alone is responsible for many small businesses failing in their very first year.”
Why should the effect be so widespread? For one, Inke notes that most company founders tend to overestimate their abilities and underestimate the abilities of others.
Some individuals also approach entrepreneurship in a way that is counterintuitive to success.
They may apply irrelevant or misleading life experiences, rely on incorrect business facts or theories, or be influenced by certain heuristics, metaphors, and hunches that have no basis in reality.
Collectively, these factors equip the entrepreneur with a false sense of knowledge and confidence.
Failing to understand the industry
Inke also mentions the failure to properly understand an industry as the source of some of the most spectacular start-up demises in history.
Pets.com founder Greg McLemore previously ran a toy company and assumed selling pet products would be similar.
Adam Neumann, the founder of WeWork, created a clothing company and then decided to start a commercial real estate business for clients who required flexible office space.
In both cases and indeed in many others, the founders assumed that their knowledge in one industry was transferable to another.
The full WeWork story, told by Eliot Brown, the WSJ reporter who followed the evolution of Adam Neumann’s story since the early days!
Entrepreneurship and the Dunning-Kruger effect graph
The journey of an entrepreneur, according to the Dunning-Kruger effect, can be illustrated on a graph and is not dissimilar to that which is portrayed on the graph of the popular startup curve.
The phases of the Dunning-Kruger effect are plotted against confidence on the y-axis and competence on the x-axis and include:
The peak of “Mount Stupid”
In the initial stages, the entrepreneur is extremely confident but knows almost nothing about the market forces that shape the industry.
Inke acknowledged that some individuals will stay in this phase until they are exhausted, broke, or both.
The “Valley of Despair”
Much later, after the entrepreneur has deployed a serious amount of time and money, they start to find multiple problems with their idea.
These are problems that have prevented those with actual knowledge from entering the industry in the first place.
The slope of enlightenment
If the entrepreneur can recognize errors in their thinking and the resilience to move forward, they may pivot to a more viable business idea.
Ideally, to avoid the Dunning-Kruger effect, they would pivot to an industry in which they possess the necessary knowledge or expertise.
Plateau of sustainability
As competence increases over time, the entrepreneur becomes a guru and has developed a sustainable and stable businessmodel.
That is, they have conquered the Dunning-Kruger effect.
Overestimating Industry Knowledge
A tech enthusiast with no prior experience in the healthcare sector starts a healthcare startup, believing that their general understanding of technology will translate into success in the healthcare industry.
Assuming Transferable Skills
An individual who successfully ran a restaurant believes they can easily replicate their success in the retail industry without considering the unique challenges and dynamics of the retail market.
Lack of Market Research
An entrepreneur launches a new product without conducting thorough market research, assuming that their idea is brilliant and will automatically attract customers.
Ignoring Competitor Analysis
A founder underestimates the competition in their industry, assuming that their product or service is superior without thoroughly analyzing existing competitors and market trends.
Overconfidence in Business Strategy
An entrepreneur is overly confident in their business model and refuses to adapt or pivot, even when faced with clear signs of customer disinterest or market saturation.
Unrealistic Revenue Projections
A startup founder overestimates potential revenues based on unrealistic assumptions, leading to financial troubles when the actual results fall far short of expectations.
Neglecting Expert Advice
An entrepreneur dismisses advice from experienced mentors or industry experts, believing they know better despite their limited experience in the field.
Failure to Seek Feedback
A founder avoids seeking feedback from customers or employees, assuming they have all the answers and that their decisions are infallible.
Ignoring Early Warning Signs
An entrepreneur disregards early warning signs of trouble or negative feedback, maintaining unwarranted optimism about the success of their venture.
Persisting in Unprofitable Ventures
An entrepreneur continues to invest time and money into a failing business, convinced that success is just around the corner and failing to recognize the need to cut losses and pivot.
Misguided Entry into Healthcare:
Example: A software developer with no prior healthcare experience starts a healthcare tech startup, assuming their coding skills and general tech knowledge are sufficient for success in the complex healthcare industry. This overestimation of their abilities may lead to challenges in understanding healthcare regulations and patient needs.
Retail Industry Transition:
Example: A successful restaurateur decides to venture into the retail industry without considering the unique demands and competition of the retail market. They believe their experience in running a restaurant will easily translate to success in a different sector, potentially leading to challenges in understanding retail trends and consumer behavior.
Product Launch Without Research:
Example: An entrepreneur launches a new software product without conducting thorough market research. They assume that their idea is groundbreaking and will naturally attract a large customer base. However, they may overlook critical customer preferences and market demand.
Underestimating Competitors:
Example: A founder underestimates the competitive landscape of their industry, believing their product or service is far superior to existing alternatives. Without conducting a proper competitor analysis, they may miss potential threats and market trends, leading to eventual setbacks.
Stubborn Business Strategy:
Example: An entrepreneur becomes overly confident in their initial business strategy and refuses to adapt, even when faced with clear indications of customer disinterest or market saturation. This reluctance to pivot or change course can hinder the company’s growth and sustainability.
Inflated Revenue Projections:
Example: A startup founder generates revenue projections based on overly optimistic assumptions, such as rapid customer acquisition or unrealistic pricing strategies. When actual results fall significantly short of these projections, the company may face financial difficulties.
Ignoring Expert Advice (Again):
Example: An entrepreneur dismisses advice from seasoned mentors or industry experts in their new venture, assuming they know better. Despite limited experience in the field, they reject valuable guidance and insights, potentially missing opportunities for improvement.
Avoiding Feedback:
Example: A founder avoids seeking feedback from both customers and employees, convinced that they possess all the answers. They fail to acknowledge the value of external input and may overlook critical improvements or necessary changes in their business.
Blind to Warning Signs (Again):
Example: An entrepreneur ignores early warning signs of trouble, such as declining sales or negative customer reviews. They maintain unwarranted optimism about the success of their venture, failing to recognize the need for adjustments or corrective actions.
Persisting in Unprofitable Ventures (Again):
Example: Despite mounting losses and minimal customer interest, an entrepreneur persists in investing time and resources into a failing business. They remain convinced that success is imminent, neglecting the need to cut losses and pivot towards a more viable opportunity.
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.
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.
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.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
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.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
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 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.
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.
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 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.
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.
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 in marketing can be associated with social proof.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
