Know what you don't know

February 10, 2015 | David Fraser Print

As an avid basketball fan, I have been enjoying the recent success of the Golden State Warriors, who currently hold the best record in the NBA’s Western Conference. What is particularly noteworthy is that this feat has come under the direction of rookie head coach Steve Kerr. A novice to the position, Kerr’s accomplishment is widely attributed to his ability to know what he doesn’t know.

Kerr has made a point of surrounding himself with people who are experts in areas that he is not. As investors, we might consider how this type of reflection and evaluation can contribute to our own goals and objectives.

As a general rule, it is important for all of us to examine our own limitations and to seek counsel from those who are more knowledgeable. The problem, however, is that most individuals are not realistic when assessing their own capabilities. Illusory superiority, for instance, is a cognitive bias whereby individuals overestimate their own qualities and abilities.1 Illusory superiority impacts many of the perceptions that we hold about ourselves, including our level of intelligence and even our ability to be popular among friends. For example, nearly 80% of individuals consider themselves to be above average drivers.2

With regard to investing, two-thirds of investors believe that their best investment was due entirely to their own skills and decision-making. This self-congratulatory attitude occurs despite the fact that half of the individual investors in the U.S. and Canada admit to spending more time reading free catalogues than reviewing their investment statements.3 This seems to indicate a rather significant disconnect between how little we engage in our investments and how confident we are in our investing ability.

The question of how much human emotion and biases impact investors’ decisions has been of increasing interest to investment professionals and academics. Kruger and Dunning’s study, Unskilled and Unaware of it: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments, was inspired by the story of a bank robber who covered his face with lemon juice in the mistaken belief that since lemon juice is used as invisible ink, it would likewise prevent his face from being seen by the bank’s surveillance cameras. This psychological study concludes that people actually suffer a dual burden from illusory superiority; not only do they reach mistaken conclusions and make regrettable errors, but their incompetence also robs them of the ability to realize it.4

Warriors coach Steve Kerr has not let go of the reins entirely, just as one should not give up control of their investment portfolio entirely. However, as is illustrated by the Golden State Warriors, it is essential to reflect on individual knowledge and be critical of our own capabilities. If it is at all possible to objectively critique ourselves, it may be time to look in the mirror and recalibrate our own assessment of our investing abilities. By knowing what we don’t know, we increase the chances of consulting the right specialists and consequently, the chances of reaching our financial goals.

 

1 Hoorens, V. (1995). “Self‐Favoring Biases, Self‐Presentation, and the Self‐Other Asymmetry in Social Comparison.” Journal of Personality, 63(4), 793-817.
 2 McCormick, Iain A.; Frank H. Walkey; Dianne E. Green (June 1986). "Comparative perceptions of driver ability - A confirmation and expansion". Accident Analysis & Prevention 18 (3): 205–208. doi:10.1016/0001-4575(86)90004-7.
 3 The Centre for Applied Research (2014). “The Folklore of Finance – How Beliefs and Behaviour Sabotage Success in the Investment Management Industry”.
 4 Kruger, J., & Dunning, D. (1999). “Unskilled and unaware of it: how difficulties in recognizing one's own incompetence lead to inflated self-assessments.” Journal of personality and social psychology, 77(6), 1121.

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