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The Dunning Kruger Effect in Finance

The Dunning Kruger Effect is the tendency for people to think they’re better at something than they really are. You’ve probably heard the studies about how more than 50% of people think they’re better than average drivers or better than average lovers or something like that. That obviously can’t be true though I will tell you that I am definitively a better than average driver and a worse than average lover (I might have that backwards, but I can’t remember to be honest – no, come to think of it, my driving record is nearly flawless).

I had to cry a little bit as I was reading through this SEC document on basic financial literacy which found that about 70% of respondents believed they had a “high” level of financial literacy.  Meanwhile, 70% of them couldn’t pass a basic financial exam.  An astounding 1% of the respondents earned a grade of A (over 90% correct).  That’s pretty sad. We tend to know less than we think we know. And that seems to be even truer in a field as complex as finance and economics where even the well established experts regularly disagree on things.

I know it’s not a huge help, but I try to archive many of my favorite educational pieces on the Understanding Money page on the Orcam website. If you haven’t been over there please go check it out.  There probably aren’t that many things in life that are more important than understanding one of the only tools (money) we use on a daily basis….