Know what you know and what you don’t

I read an interesting article by Olivia Goldhill titled “The person who’s best at lying to you is you”.

Ms Godlhill says that people who are incompetent and lack knowledge in a field tend to massively overestimate their abilities because, quite simply, they don’t know enough to recognize what they don’t know. So hugely unqualified people erroneously believe that they’re perfectly qualified. Studies collectively show we repeatedly and consistently fool ourselves into thinking we know more than we do, and so convince ourselves that our opinion or choice is right—even when there’s absolutely no evidence to support this. Our false confidence in our own beliefs also deters us from asking for advice when appropriate—or to even know to whom to turn. To recognize superior expertise would require people to have already an abundance of expertise themselves.

The issue is that the current environment convinces people they’re more informed than they actually are. It might actually be better for people to feel uninformed. When people are uninformed, they know they don’t know the answer and so they will be more open to hearing from others with real expertise. If we think they know enough, however, we’ll just cobble together what seems to us to be the best response possible to someone asking us our opinion, or a policy, or what we think. Unfortunately, we’re programmed to know enough to cobble together an answer.”

There’s no quick fix to this, but there is a key step we could take to avoid being so willfully misinformed. We need to not only evaluate the evidence behind newly presented facts and stories but evaluate our own capability of evaluating the evidence. The same questions we consider when evaluating whether to trust another person should apply to ourselves: “Are you too invested in this thought or belief you have? Are you really giving the conclusions you’re reaching due diligence? Are you in over your head?”

Ms Goldhill concludes that constantly questioning ourselves would be impractical, leading to a constant state of self-doubt and uncertainty. Most effective would be to focus on situations that are new to us, and where the stakes are high. Normally those two situations go together. Of course, at some point, you have to give up being savvy and just trust your own judgment—both in yourself and others.

For me, this begins to explain why so many people take financial decisions that they do not fully understand, why people do not turn to advisors to get their financial life in order, why financially literate people invest in products that are too complex and finally why someone who accepts that s/he knows nothing about financial world makes the least number of mistakes. The first step to success in financial life – know what you know and what you don’t.