Are You Dangerously Overconfident?

Whether you are yet familiar with the Dunning-Kruger Effect or not, it is a theory that has a profound impact on our lives and you can avoid the worst of its dangers by being aware. Overconfidence can cost a young entrepreneur money, talent, and time – and with the added risks and opportunities of 2021’s unique economic environment, it’s more important than ever for aspiring moguls to step back, self-reflect, and think about some weak points where Dunning-Kruger can easily creep in.

Understanding the effect in question

In 1999, psychologists David Dunning and Justin Kruger published a groundbreaking paper, “Unskilled and Unaware of It,” in which they demonstrated that people assume they are more knowledgeable or talented than they actually are, in a number of domains. In other words, we all overestimate our skills or expertise in some way. But Dunning and Kruger went further to point out that the more unskilled you are, the more likely you are to overestimate your abilities.

There has been a lot of discussion relating to the Dunning-Kruger effect related to politics and COVID-19 science in 2020 and 2021. But the concept is also an important one for those in finance and is especially relevant for young business owners who have not yet made enough mistakes to learn harsh Dunning-Kruger lessons.

Overcommitting and over outsourcing

In my opinion, the biggest Dunning-Kruger threat for small business owners is that we often take on new challenges that we don’t have the skillset for, instead of hiring specialists and outsourcing tasks to experts. As the founder of The Doe, I felt confident that I knew how to handle most aspects of the company I had created. But bringing in talent to focus on product creation, UI development, and social media have only demonstrated that I was right in realizing that I did not have the specialized knowledge I assumed I had.

For many companies, the restricted economy of 2020 meant layoffs or downsizing. Many pushed forward with their dreams with a skeleton crew. These hardworking and industrious owners kept the economy going and kept their dreams growing by becoming a jack of all trades, taking on extra responsibilities, and filling in the gaps. But we can’t let Dunning-Kruger lure us all into assuming that we should maintain that overcommitment and stop-gap effort as the economy stabilizes in 2021.

Owners need to remember to not take on fields and tasks outside their competencies. Instead, outsource our weaknesses to dynamic, talented experts and let them work their magic.

Forgotten elders

With so many of us tucked away in quarantine for almost a year, it has been harder to stay connected to co-workers, creative partners, and professional mentors. It is easy to forget that young entrepreneurs can learn a lot by picking the brains of older colleagues and friends who can describe lessons learned from previous mistakes. Dunning-Kruger often encourages us to ignore others who remind us that we don’t know as much as we want to believe, and 2020’s social isolation made that even easier.

A smart and self-reflective young owner will recognize the importance of learning from mentors and will make the effort to create opportunities to still have those interactions. Digital coffees, zoom cocktails, and other ways of connecting with advisors will remind us all of our limits and where we can learn more, and avoid the isolation that allows Dunning-Kruger to fester.

Beginner’s luck and Robinhood

So many of us put business plans on hold in 2020, until our industries rebounded; but our boundless energy motivated us to grow our capital while waiting. With the massive growth of commission-free trading, new amateur-trading platforms like the now maligned Robinhood, and a clear market bottom in March 2020, a significant number of young entrepreneurs used 2020 as a chance to invest business funding into the stock market and multiply their seed money. These success stories could continue to turn tragic, as 2021 continues if these entrepreneurs get too distracted by the siren’s call of a hot market.

The Robinhood story is a confluence of an unusual 2020 market and a set of untempered new investors. 2020’s wild ride in the stock market meant nearly anyone could make money, it’s just a matter of how much. A perfect scenario for Dunning-Kruger. Billionaire investor Chris Sacca took a swipe at the Robinhood bro culture, arguing that all the brand new investors who made money in the market this year “are not actually that good at it.” Sacca’s point is a tip of the hat to Dunning-Kruger: Many of those Robinhood investors who made, and continue to make, serious gains now see themselves as knowledgeable and skilled. If those investors are banking on those skills to fund their next venture, they may find themselves on the wrong side of the Dunning-Kruger Effect.

2021 offers a chance to evaluate your talents… and limits
As a young entrepreneur myself, I have always argued that self-reflection is a necessary step in being a great leader. One of the most important processes for successful self-reflection is honestly evaluating what we are good at and where we do not possess expertise. Being aware of the Dunning-Kruger Effect, especially as it pertains to bad habits we might have picked up in 2020, allows us to avoid its pitfalls and traps.

A new study commissioned by GoDaddy found nearly 86% of respondents looking for a career change wanted a path that was completely different from what they currently do. Comfortingly, in order to get a leg up in their job hunt, 47% of those polled turned to take online courses while 42% learned a new digital skill and 31% have begun building a professional network.

If there’s a bright side to this otherwise overconfident morass, it’s that actual education and preparation may once again be in vogue.