Misplaced confidence

One of the worst things I do – and I do it often enough to consider getting professional help for the situation – is give people directions I should not be giving. By that I mean that people ask me for directions and then I provide directions, even though 90 percent of the time I am not qualified to give those directions.

I’m not trying to be malicious, though. I want to help. And in that moment when a stranger stops me and asks how to get somewhere, I really believe that I can help them. I see the route in my mind. I genuinely believe that the directions I’m about to provide will work. So I give the directions. And as soon as the person walks away I realize that I’ve just doomed them to becoming even more lost than they already were.

While the specifics of my “sickness” might be unique, that false confidence is actually pretty common and it has a name: the Dunning-Kruger effect. Named after two Cornell University researchers, the Dunning-Kruger effect describes the phenomenon wherein individuals who are incompetent in certain areas grossly overrate their abilities in those areas, while other individuals who are competent tend to underrate their abilities.

As David Dunning has said, “If you’re incompetent, you can’t know you’re incompetent. The skills you need to produce a right answer are exactly the skills you need to recognize what a right answer is.”

Writing for Pacific Standard, Dunning recently connected this cognitive bias to financial literacy. Citing the 2012 National Financial Capability Study conducted by the Financial Industry Regulatory Authority, Dunning noted that respondents who had filed for bankruptcy within the previous 2 years, on the whole, rated their financial knowledge higher than respondents who had not recently filed for bankruptcy. That same group, however, performed terribly on the actual financial capability test, scoring in the 37th percentile.

So it’s not simply that this group didn’t know all that much about finances – it’s that they were convinced that they did know a lot. That same group was 67 percent more like to pick an incorrect answer rather than simply state that they didn’t know. Meanwhile, 23 percent of the recently bankrupted gave themselves the highest possible rating versus only 13 percent of everyone else.

How does that even happen?

The problem is less a lack of information, and more a build-up of misinformation. As Dunning states, “An ignorant mind is…one that’s filled with the clutter of irrelevant or misleading life experiences, theories, facts, intuitions, strategies, algorithms, heuristics, metaphors, and hunches that regrettably have the look and feel of useful and accurate knowledge.”

Our brains are built to find patterns. We’re constantly aggregating information into something that makes sense or provides an answer. But we’re creative as well, and that’s how we end up often filling in the blanks with something that seems like the truth, but isn’t really.

That’s especially dangerous when it comes to money. Thinking or assuming that we understand how to manage and make the most out of our finances is one thing – actually being able to do it is another.

Your best bet is stop assuming you know everything there is to know about personal finance and make sure that you really are making the best possible choices for you and your family. Try a free online seminar. Be open to learning, but more importantly, be honest about what you don’t know. It’s okay to not know things. It’s only when you act like you do that people end up circling the highway for 30 minutes, looking for an exit ramp that doesn’t exist.

Because seriously, never ask me for directions.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

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