The Surprising Reason You Lose Business
June 9, 2015
by Dan Solin
PDF | Page 2
When investors are looking for a hedge fund to invest their money with, they usually look at returns. Of course, the larger the positive return, the better, but what about during major market selloffs? It may be easy to discount a hedge fund's negative return when everyone else lost a lot of money. However, hedge Read More
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
You have a meeting with an important prospect. Instead of presenting data about you and your firm, you carefully elicit information throughout the conversation, so you can completely understand the prospect’s needs. You respond to questions succinctly. You believe you have demonstrated that you are ideally suited and should be retained. You leave the meeting confident that you have won over the prospect.
Subsequently, the prospect contacts you with the disappointing news; she has decided to go in another direction.
The Dunning-Kruger effect
Chalk up your failure to the Dunning-Kruger effect.
The Dunning-Kruger effect is based on findings in a research paper by Justin Kruger, now at New York University, and David Dunning, a member of the psychology department at Cornell University. In a series of experiments, Dunning and Kruger demonstrated that many of us suffer from what is called “illusory superiority,” a cognitive bias in which we overestimate our ability to make wise judgments or perform tasks.
In one experiment, professional comedians were asked to rate 30 jokes and determine which ones they thought were the most humorous. Undergraduate students were then asked to rate the same jokes. The accuracy of their determination was based on the correlation between their ratings and those of the professional comedians.
The results of this study are fascinating. Participants whose rankings correlated the highest with those of professional comedians thought they were only slightly above average in their joke-assessment ability. In stark contrast, participants with the lowest scores had a grossly inflated view of their ability to correctly assess the jokes.
Across the four studies Dunning and Kruger conducted, participants in the bottom quintile not only overestimated their ability to make accurate determinations, but also thought they were above. The researchers concluded that “ignorance is bliss – at least when it comes to assessments of one’s own ability.”
Participants who performed poorly suffered a double deficit. Their skill set for the assigned tasks was sub-par, and they had an inability to accurately assess their competence.
A critical conclusion of this study is that “people systematically overestimate their ability and performance.” As a corollary to this finding, the researchers noted that people who make predictions do so with confidence that “far exceeds their accuracy rates.”
To validate this observation, turn on CNBC at any time of the day and watch self-styled financial “gurus” give supremely confident opinions about which stocks to buy or sell or the direction that the market is headed.
In some settings, like friendly athletic competition, the inability to recognize personal deficiencies can be harmless. In others, it will have profound consequences. For example, hunters with the least amount of knowledge about firearms have a vastly distorted perception of their ability to handle potentially dangerous weapons.
PDF | Page 2
Remember, if you have a question or comment, send it to [email protected]
© 2015, Advisor Perspectives, Inc. All rights reserved.