Mini-post: The Beginner Bravado Effect, and the “Shit Shit Shit” Implication
I Am A Terrible Investor collects stories of awful investments made by smart people. The purpose is to reduce mistakes due to overconfidence, share lessons from real losses, and have some fun with all of this.
Usually we share stories of losses from members, and sometimes we have mini-posts about psychology, business, or whatever we feel like.
When you know the basics of a “beginner’s” psychology, you will never be surprised at the mistakes of overconfident beginners ever again.
Take a look at what the brain goes through as it’s learning something, and what the implications are on awful investing.
An Important Idea with a Boring Name
The boring name for this is the “Dunning-Kruger Effect.” I like to call it the “Beginner Bravado” Effect. (Why can’t people name things helpfully, instead of just after themselves? Narcissists.)
This graph shows the cause of my investing mistakes. It is very easy to be confident when you only have a little bit of knowledge and experience.
Being extremely confident is an addicting feeling. Once you’re there, you really don’t want to give it up. It’s much more fun to continue to believe that you are a genius — a soon to be a rich genius.
I know the Dunning-Kruger Effect won a Nobel Price and everything, but I think it stops short of the most important implication.
The “Shit Shit Shit” Implication
It’s not just the level of confidence that matters — it is what that means for our actions and the probable outcomes of our actions.
With that, I humbly present my “improvement” upon Dunning-Kruger:
This abomination of a graph shows us that during the beginning of our journey to accumulate knowledge, we are actually in a place where the “utility” (usefulness) of our knowledge is negative. NEGATIVE usefulness!
When we have beginner-level knowledge, we are prone to oversimplify. We have no knowledge of the nuances, the second-order effects, and the non-obvious challenges. We are likely to make awful investments.
The Lollapalooza of Ignorance
These two ideas are meaningful and useful individually, but if you can push both ideas together, you see a whole new phenomenon.
Looking at these two charts together — what do you notice?
When you are MOST likely to move (peak confidence), you are likely to have the WORST outcome (minimum utility).
The first time I saw this effect I felt relieved. I suddenly understood so many of my own mistakes throughout my life. It also explained a lot of the stupidity I see in the world at large.
The moments where I think I’m the smartest I’m actually a huge danger to myself. It’s not that we’re hopeless and doomed to failure forever… it’s that we get crushed early and often give up, during the biggest delta between confidence and utility.
If we push through the early stages of ignorance and get closer to expert status, we will find our outcomes improve — even if we never feel the extreme confidence of the ignorant beginner again.
This is the inspiration for “I Am A Terrible Investor” and leads directly into the purpose of the project.
A New Hope
The only two goals of I Am A Terrible Investor:
- Cut the tip off that confidence peak with funny, memorable stories about painful losses and how hard investing is. Let’s admit to ignorance.
- Shift that Utility curve to the left by collecting and sharing some lessons that we can all learn from. Let’s be experts sooner.
To be a part of this, please join here by sharing your email.
“Some problems are so complex that you have to be highly intelligent and well-informed just to be undecided about them.”
— Laurence Peter
If you have a story of losing money and getting your ass kicked — write it up and share it with us! I’ll publish stories of all kinds contributed from readers as posts. (Anonymously if you prefer)
You are welcome to write it yourself. If you prefer, I’m happy to hear the story over the phone and turn it into a post for you.
Email me about your stories: Eric@iamaterribleinvestor.com
I look forward to learning with you.
