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The Cognitive Bias Handbook Part I
Episode 21
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Today at a Glance
Cognitive biases are systemic errors in thinking that negatively impact decision-making quality and outcomes.
Combatting cognitive biases relies first and foremost on establishing a level of awareness of the biases.
Overview, examples, and combat tactics for common biases, including Dunning-Kruger Effect, Fundamental Attribution Error, Bandwagon Effect, Egocentric Bias, Naïve Realism, Baader-Meinhof Phenomenon, Pygmalion Effect, Confirmation Bias, Backfire Effect, and Anchoring.
The Cognitive Bias Handbook - Part I
Cognitive biases are systemic errors in thinking that negatively impact decision-making quality and outcomes. I recently shared a Twitter thread covering the basics of 20 cognitive biases - but it was admittedly surface-level (280 characters only allows for so much depth and nuance on a topic!).
So here we are. It’s time to dive deeper on cognitive biases, including examples and specific ways to combat each one. To avoid a monstrous newsletter piece that no one has the time to read (or listen to), I will be splitting the coverage of the 20 cognitive biases across 2 newsletters over the coming weeks (with each covering 10 common biases).
This two-part newsletter series will be split as follows:
Part I: Fundamental Attribution Error, Bandwagon Effect, Egocentric Bias, Naïve Realism, Baader-Meinhof Phenomenon, Pygmalion Effect, Confirmation Bias, Backfire Effect, Anchoring, and Dunning-Kruger Effect.
Part II: Ben Franklin Effect, Loss Aversion, Endowment Effect, Availability Bias, Survivorship Bias, Ikea Effect, Hindsight Bias, Plan Continuation Bias, Gambler’s Fallacy, and Curse of Knowledge.
This handbook is designed to be a resource you can save and come back to whenever you need a refresher. Without further ado, let’s dive into Part I…
Dunning-Kruger Effect
What is it?
The Dunning-Kruger Effect says that people with a low objective ability at a task are prone to overestimate their ability at that task.
Humans are notoriously incapable of objective evaluation of themselves, including of their competency levels.
(Note: see below for a deep-dive thread I wrote on Dunning-Kruger!)
Examples
“Everyone is a genius in a bull market.”
This is a common phrase heard in the investment world during bull markets. When everyone is making money, everyone starts to fancy themselves expert investors. They fail to separate their objective skill at the task from the outcomes.
If you start hearing more and more people bragging about their stock market prowess, the market is entering the danger zone.
How do you combat it?
Several tactical strategies for combatting the Dunning-Kruger Effect:
Identify your circle of competence: Know what you know, and what you don’t.
Get comfortable with “I don’t know”: Most people are afraid of this phrase. Get comfortable with it.
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Published on 4 years, 5 months ago