The internet and the overconfidence bias are a lethal combination

Can we have an army of generals?
The internet has turned us into experts on everything

It seems that as we look things up on the Web, we become convinced that the information remains in our brains. It doesn’t. But we behave as if it does, and we’re not shy about claiming that it’s there.

In my role as a property manager and rehabber for my rentals, I often refer to YouTube when it comes to a number of issues. If I am replacing parts in a Delta kitchen faucet, for instance, I may search out YouTube to determine exactly how to replace the faucet’s gaskets and springs. While this strategy may not work for brain surgeons, does it really matter whether your auto mechanic can change your fan belt from memory or with an assist from a quick laptop search?

I don’t think we can conclude this is some terrible strategy on the surface, but my concern is that we are often unaware of the gaps in our understanding. Because our immediate answers are being filled, we are less inclined to seek out and fill in the holes, which are usually huge. I know firsthand how large these gaps can be when discussing economic and investment matters with others.  While they may have little formal background in the subject, they will act as if they are experts.

In my example of replacing kitchen faucet parts; while this may not seem complicated, it helps to have a comprehensive and tacit understanding of plumbing. Should I repair the faucet or replace it? What type of faucet makes the most sense in a rental versus an owner-occupied property? What type of faucet will take the most wear and tear? I have a good understanding of the house’s plumbing and entire drain/waste system, but is this knowledge needed to repair a faucet? On the surface, the answer is no, but having a mastery of how water and waste work in a plumbing system provides me with many intangibles that most weekend warriors lack. This unquantifiable knowledge gap is often the difference between success and failure in real estate investing.

The same goes with most other specialized endeavors, particularity with respect to money, finance, and economics.

You can search the internet for all the studies that confirm this; people who were asked to use the internet to find or confirm their answers to a series of questions gave, on average, higher ratings of their abilities than those who were asked not to consult the internet. The common results from all these various studies included:

  • An increase in confidence among internet users, not a decrease in confidence among those not allowed to consult the internet.
  • This increase was not due to access to information or even the use of the internet to get the information. It was the act of searching for that information that caused the increase in confidence.
  • They appeared to be conflating public knowledge (the internet) with the personal knowledge (what’s in their heads).
With the internet, everyone is an expert in Economics and Politics

As described by social psychologists David Dunning and Justin Kruger, the cognitive bias of illusory superiority results from an internal illusion in people of low ability and from an external misperception in people of high ability; that is, “the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others.

Dunning–Kruger effect – Wikipedia

In other words, most people who think they are good at something are actually just confident fools. These people use that same confidence to mask their ignorance and incompetence. According to Dunning and Kruger, the actual experts underestimated their superior abilities by overestimating everyone else’s.

According to Investopedia, in a 2006 study entitled “Behaving Badly,” researcher James Montier found that a whopping 74% of 300 professional fund managers he surveyed believed that they had delivered above-average job performance. The majority of the remaining 26% of those surveyed believed that they were average in their performance. Nearly 100% of those surveyed felt that their performance was average or better. In actuality, of course, only 50% of a sample can be above average. This discrepancy suggests that many of these fund managers displayed an irrationally high level of overconfidence.

The worst part is that this survey was conducted with seasoned investing professionals. Perhaps these people weren’t as knowledgeable as they thought. We have discussed the Dunning Kruger effect in the past. Perhaps this can help answer why there are so many alt-financial “experts” who continually dispense poor advice, while continually making incorrect market predictions.

I used to believe that many of these alt-financial personalities were disinfo agents. But after analyzing many of them, I have to conclude that they are just incompetent. They may be disinfo agents, but not of their doing. Perhaps people much higher up than we are promoting the less-talented.

Truth is, the less we know about a subject, the more we tend to believe ourselves to be experts. It is only once we become experienced in a subject do we start to recognize the breadth and depth we have yet to learn. Stupid amateurs think they know it all.

So, if you are taking the advice of an expert in the alt-financial media, yet  not making money, keep the Dunning-Kruger effect in mind and look elsewhere for answers.