Don’t trust yourself

Have you ever been convinced that you could predict how well you would perform in any stock market situation?

If the answer is yes, then you are suffering from the Dunning-Kruger Effect.

What that effect literally means is that you are so bad at a task that you lack the capacity to realize just how bad you are.


Markus Glaser and Martin Weber of the University of Mannheim showed that investors who earn the lowest returns are the worst at judging their own returns; they literally had no idea how bad they were.  “The correlation between self-ratings and actual performance is not distinguishable from zero,” they wrote.

And decades of research have implied that when it comes to collecting and analyzing facts about ourselves and our experiences, most of us have the equivalent of an Advanced Degree in Really Bad Science.

How so?

Because we cook the facts.  For example, we choose techniques that are especially likely to produce the conclusions we favour, or we control the sample of information to which we have been exposed.

Get a grip, and don’t allow the Dunning-Kruger Effect to cast its shadow!

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If you want to excel at something, you would have to practise, and then you would have to sample the work of others who have been practising it their whole lives.  Additionally, you would have to make comparisons, perhaps, even eat some humble pie, and thereafter, check your emotional state.

Because emotions literally change the brain chemistry.  Thus, recognize the emotional state that you are in: ecstatic or feaful, because either would result in chemical activities in your brain that would restrict thought.

If you recognize, “I’m scared because the market just dropped,” then, that’s the moment to also recognize, “I’m in an emotional state that predisposes me to make an irrational decision.”

Moreover, when strong emotions trigger intense reactions, be aware that you would intuitively be turning to actionany kind of actionsince that’s how you are hardwired.

First of all, don’t act in the heat of the momentit’s not the moment to make a decision.

Thereafter, reflect on your core values and goals (you have them clearly spelled out somewhere, right?).

Then, when you’ve calmed down (a bit of “ooohmmm” might be helpful) and your rational brain is back in control, respond.

Bias: Stop and think first

“Don’t think about what the market’s going to do; you have absolutely no control over that.  Think about what you are going to do if it gets there” — William Eckhart

 “We believe our own judgments are less biased and more independent than those of others partly because we rely on introspection to tell us what we are thinking and feeling, but we have no way of knowing what others are really thinking.” — Carol Tavris and Elliot Aronson,  Mistakes Were Made (But Not By Me)

“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubt.” — Bertrand Russell

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