At the Money: David Dunning professor of psychology at the University of Michigan (January 10, 2024)
How well do you understand yourself? For investors, it is an important question. We’re co-conspirators in self-deception and this prevents us from having accurate self-knowledge. This does not lead to good results in the markets.
Full transcript below.
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About this week’s guest:
David Dunning is a professor of psychology at the University of Michigan. Dunning’s research focuses on decision-making in various settings. In work on economic games, he explores how choices commonly presumed to be economic in nature actually hinge more on psychological factors, such as social norms and emotion.
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Transcript: David Dunning
The financial writer Adam Smith once wrote, if you don’t know who you are, this is an expensive place to find out. He was writing about Wall Street and investing and his insight is correct. If you don’t know who you are — and if you don’t understand what you own, how much leverage you’re undertaking, how much risk you have — this is a very expensive place to learn that lesson the hard way.
I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss self-insight, our ability to know ourselves and understand our abilities. To help us unpack all of this and what it means for your portfolio, let’s bring in Professor David Dunning of the University of Michigan.
He is the author of several books on the psychology of self. And if his name is familiar, he is the Dunning in Dunning Kruger. Welcome, professor. Let’s just ask a simple question. How come it’s so hard to know ourselves?
David Dunning: There are many, many reasons (and thank you for having me). Well, in many reasons, there are problems in knowing ourselves in terms of our character and in knowing ourselves in terms of our competence. In terms of our character, we overplay how much agency we have over the world. We’re not as influential as we think. And in terms of confidence, we overestimate how much we know.
Now now each of us knows a tremendous amount, but by definition, our ignorance is infinite. And the problem with that is our ignorance is also invisible to us. That creates an issue.
Barry Ritholtz: So what other roadblocks and detours are there on the path to knowing thyself?
David Dunning: Well, it’s the invisibility of our flaws and our foibles. Some of it is the world – it’s not a very good teacher. It doesn’t tell us. Its feedback is chancy. Often, its feedback is invisible. What doesn’t happen to you as opposed to what does happen to you. What people tell you, to your face is different from what they’re saying behind your back.
So the information we get, our information environment is either incomplete or it’s misleading. And beyond that, we’re co-conspirators. We engage in self-deception. We protect our egos. We are active, in the duplicity in terms of getting to accurate self-knowledge.
Barry Ritholtz: We’ve discussed before, any decision or plan we make requires not 1, but 2 judgments. The first judgment is what the item we’re deciding about is, and the second judgment is our degree of confidence in assessing whether or not our first judgment was valid. Which is the more important of the two
David Dunning: It should be the second 1, but we tend to focus on the first 1. We tend to focus on our plans, the scenario. And we tend to ignore or neglect the second one, the fact that life happens and life tends to be unexpected. Um, we should expect the unexpected, We should be sure to think about what typically happens to other people and have plan Bs and plan Cs for when those sorts of things can happen. Or at least have plans for unknown things that can happen because the 1 thing we know is that unknown things will happen.
And everything in the past has always been slower than we expected. We should expect everything in the future is going to be expected, but we tend to overweight, give too much attention to our plans and not think about the barriers and not think about the unknown barriers that are certainly gonna hit us in the future.
That’s why what I mean by, the fact that we tend to give too much weight to our agency in the world, not give credit to the world and its deviousness in thwarting us.
Barry Ritholtz: So let’s talk a little bit about how illusory our understanding of our own abilities are. Is it that we’re merely unskilled at evaluating ourselves, or are we just lying to ourselves?
David Dunning: We’re actually doing both. I mean, there are two layers of issues. One layer of issues is, we’re not very skilled at knowing what we don’t know. I mean, think about it. It’s incredibly difficult to know what you don’t know.
You don’t know it! How could you know what you don’t know? That’s a problem. We’re not very skilled at knowing how good our information environment is, how complete our information is. That’s one issue.
The second issue is what psychologists refer to as the motivated reasoning issue, which is just simply then we go from there and we practice some motivated reasoning, self deception, wishful thinking. We actively deceive ourselves in how good we think our judgments are. We bias our reasoning or distort our reasoning toward preferred conclusion.
That stock that stock will succeed. Our judgment is absolutely terrific. This will be a wonderful investment year. There’s nothing but a rosy stock market ahead for us.
That’s the second layer. But there are issues before we even get that second layer, which is just simply, uh, we don’t know what we don’t know. And it’s very hard to know what we don’t know.
Barry Ritholtz: So we live in an era of social media. Everybody walks around with their phones in their pockets. They’re plugged into everything from TikTok to Instagram to Twitter to Facebook. What’s the impact of social media on our self awareness of who we are, has it had a negative impact?
David Dunning: I think, social media has had all sorts of impact, and I think what it’s done is create a lot of variance, a lot of spread in terms of the accuracy of what people think about themselves and the positivity and the negativity of what people think about themselves. There’s just a lot of information out there and people can truly become expert if they know what to look for.
But there’s also a lot of possibility for people to come truly misled if they’re not careful or discerning in what they’re looking at. Because there’s a lot of misinformation and there’s a lot of outright fraud in social media as well. So people can think that they’re expert, because there’s a lot of plausible stuff out there, but there’s a lot more in the world that’s plausible than is true.
And so, people can think they have good information where they don’t have good information. That involves issues like finance, that involves issues like health, that involves issues like national affairs and politics, that’s an issue.
But it’s possible to become expert if you know what to look for. So there’s a lot of variance in terms of people becoming expert or thinking they’re expert and becoming anything, but.
In terms of being positive or being negative, there’s a lot of tragedy on the Internet. So by comparison, you can think well of yourself. And it is a fact that when people go on the Internet, what they post are all the good things that happen in their life, all the good news that’s happened to them, but that’s the only thing they post. And if you’re sitting there in your rather good news/bad news life, you can think that you’re rather ordinary or you can think that you’re rather mundane when everybody else is having so much more of a best life than you are, you can think that you’re doing much worse than everybody else. So the Internet just can create a lot of different impacts on people that’s both good and bad, truthful and untruthful. It just turns up the volume and everything.
Barry Ritholtz: Yeah, we certainly see, um, social status and wealth on display. You never see the bills and the debt that comes along with that. That that that’s a really good way of describing it.
Talking about expertise, I cannot help but notice over the past few years, especially on social media, how blithely so many people proclaimed their own expertise. First, it was on epidemiology, then it was on vaccines, then it was constitutional law, more recently it’s been on military theory. Is this just the human condition where we’re wildly overconfident in our ability to become experts even if we don’t have that expertise?
David Dunning: Well, I think it is. Aand if it’s not all of us, at least it’s some of us. That is we have a little bit of knowledge and it leads us to think that we can be expert in something that we’re quite frankly not expert in.
We know a little bit of math. We can draw a curve and so we think we can become expert in epidemiology, when we’re a mathematician or maybe a lawyer or maybe we’ve heard a little bit about evolution. And so we think we can comment on the evolution of a virus when we’re not — we don’t study viruses, we’re not an epidemiologist, but we know a little bit and once again we don’t know what we don’t know.
So we think we can comment on another person’s area of expertise because we know nothing about the expertise contained in that other person’s area of expertise. A philosopher friend of mine, Nathan Ballantyne, and I have written about “Epistemic Trespassing,” where people in one area of expertise who know a little bit about something decide that they can trespass into another area of expertise and make huge public proclamations because they know something that looks like it’s, relevant, looks like it’s informative, and it has a small slice of relevance, but it misses a lot in terms of really commenting on things like international affairs or economic policy or epidemiology.
But people feel that they have license to comment on something that lies far outside of their actual area of expertise.
Now, some of us give ourselves great license to do that, but I do want to mention that this is part of being human because part of being human – part of the way that we’re built is every day we do wander into new situations and we have to solve problems, we have to innovate, we have to figure out how do I handle this situation. So, we cobble together whatever expertise, whatever experience, whatever ideas we have, to try to figure out how do we handle this situation.
This imagination is how we’re built. That’s part of our genius, but it’s a genius that we can over apply. And what you’re seeing in Epistemic Transpassing is a flamboyant way in which this genius is over applied in the public domain.
Barry Ritholtz: So wrap this up for us, professor. What do we need to do to better understand ourselves, our capabilities, and our limitations?
David Dunning: Well, I think when it comes to understanding information like the Internet, lik, reading someone who might be an epistemic trespasser for example or someone who is making grand statements about epidemiology or foreign policy or whatnot is – maybe it would be good to familiarize ourselves with the skills of journalism. And actually, I wish schools would teach journalism skills or at least fact checking skills more prominently in the American education system.
That is as we progress in the 20 first century, dealing with information is going to be the skill that we all need. Finding experts and evaluating experts – Who is an expert? – is gonna be a skill that we all need. Figuring out if we’re expert enough is gonna be a skill that we all need. And a lot of that is really about being able to evaluate the information that we confront and a lot of that really boils down to fact checking and journalism. So, finding out how to do that, I wish we have a little bit more of those skills, as a country or at least that that that’s the the nudge that I would give people.
Barry Ritholtz: Really, really very fascinating.
So to wrap up, having a strong sense of self moderated with a dose of humility is a good way to avoid disaster on Wall Street. Adam Smith was right. If you don’t know who you are, Wall Street is an expensive place to find out.
I’m Barry Ritholtz, and this is Bloomberg’s At The Money.
