Are We Dumber Than We Think?

Dennis O'Keefe |

One of the funniest game shows to ever grace the airwaves was ``Are You Smarter Than a 5th Grader?”  Hosted by Jeff Foxworthy (of “you might be a redneck” fame), it pitted adult contestants against real fifth graders.

I know what you’re saying.  “C’mon. It’s fifth grade.  I graduated fifth grade.  I should easily win.  Those people are probably not that bright.”

That is what made the show so funny.  On a consistent basis, seemingly intelligent adults were bested by 10-11 year-olds.

The creators of the show may not understand the science behind it, but they are counting on people to overestimate their skill in an area that they have limited recent experience.

There is a scientific name for this human trait.  The Dunning-Kruger Effect.  Wikipedia defines it as a  hypothetical cognitive bias stating that people with low ability at a task overestimate their ability.

Yikes.  That’s a mouthful.  Hypothetical cognitive bias???

Let’s look at it in real terms of the aforementioned game show.  How are seemingly intelligent adults bested by pre-teens?

The normal school day is about 6 hours long.  5 days a week, 40 weeks a year.  That’s 200 days.  Times 6.  1,200 hours.  That’s a lot of facts.  A lot of minutiae.

Dunning-Kruger tells us that our brains take a massive shortcut when evaluating our odds of beating a fifth grader.  We don’t think about the 1,200 hours of trivia.  We think, “I’m an adult.  I could totally take this kid.”

In fact, we’re extremely confident.  And without a refresher on the details of the atom and the Lewis & Clark Expedition, we’re not going to do well despite what our brains are telling us.

We do this all the time.  It isn’t just limited to that one guy at a cocktail party that thinks he knows everything about everything.  You and I are guilty of it when we talk politics or sports or whatever.  

I see this more often than you can believe.  

For instance, a few months ago, a man came in to inquire about me managing his portfolio.  He had his money at a major brokerage firm for many years and was dissatisfied with their performance.

His monthly statement ran over 30 pages.  On that basis alone, I’d be upset.  A single account.  Thirty pages.

As I reviewed the statement, he began telling me about his evaluation.  It was very involved.  He had tracked the performance of the different parts of the portfolio for years.  

(Aside:  While all in one account, the firm had broken up his portfolio into several very distinct “buckets” and displayed the performance for each bucket separately.)

“I’m very happy with Bucket A, but B, C and D are not very good.  I want to keep A and get rid of the rest and do something different.”

That was strange.  So I asked the natural question.  “Why not just put B, C and D into A?”

He didn’t have an answer.

I delved further and asked him why he thought A was a good investment.

“It has the highest return.”

To be fair, the return on A wasn’t terrible.  It was in line with what the stock market had performed during the same time period.  For how it was invested, it was average. 

But as I looked at the statement, and the spreadsheet analysis this man had put together, I realized that he didn’t have a good handle on how to evaluate his portfolio or any other investment options.  Every decision was based solely on how the five investments did in comparison to each other.

It would be like owning three cars, a 78 Plymouth Volare, a 62 Chevy Nova and a 2015 Honda Accord and on that basis alone, stating that the Accord was the best car out there because it had power windows, ice-cold A/C and no rust.

Sadly, he was convinced that his analysis was perfect.  He was so sure that his conclusions were correct.

This man isn’t special.  You and I can become convinced of our own brilliance just as easily.  And that can lead to tragic financial mistakes.  Sometimes we make lucky choices in our financial lives and conclude we must be some sort of genius.

You hear about it every day, I bet.  You just don’t notice it.  Think of all of the crypto experts out there.  Ask any one of them how crypto-currencies work.  You’ll get a blank stare.  

Ask them how they know they’re going to make money, and they’ll talk about how Bitcoin went up in price in the last year so it will go up this year.  There is no answer.  And they are convinced they are going to be rich.  And they are shocked when the markets turn against them, as they almost always do.

So how can we beat Dunning-Kruger?  By admitting we know little-to-nothing about a subject.  That subject might be the stock market or income taxes or even the Ottoman Empire.

But by admitting we know little - by accepting a bit of humility, we can carefully evaluate our decisions.  From there, our knowledge expands.  

It will be frustrating at first.  I promise you that.  The more you know, the more you realize you don’t know.  That’s the paradox of learning.  

Once you are comfortable in the paradox, you won’t fear learning.  You won’t fear saying ,”I don’t know.”  And, in time, you will know!  More than you could imagine.

Out of that knowledge comes better decisions.  Maybe with your taxes.  Maybe with the stock market.  Or maybe with the Ottoman Empire.  

Thanks for taking the time to read our blog this week. If you have any questions or concerns, please don’t hesitate to email us at or call us at (800) 453-3209.  If you don’t already have a copy of my book, The Biggest Financial Mistakes Retirees Make, you can order it on Amazon or click here and we will get a copy out to you, free of charge!  

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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service.  Statistics and other figures are accurate at the time of original publishing.  Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns.  Always count your change