Dunning-Kruger: Reading blogs doesn’t make you smart

I keep telling you that I’m a dumbass. However, my ability to recognize that I don’t know what the hell I’m talking about probably makes me more of an expert than most of the people on the internet. Basically, I know very little about investing money. Chances are, you know very little, too. That doesn’t keep us from talking about it as if we did know what in the hell we were doing.

Today, I want to share with you the story of the “smart” student. This is a story about that student you know from one of your past classes that “knew” everything already, loudly trumpeted that “fact,” and basically pissed everyone off while demonstrating a complete lack of mastery at every moment.

After this little story, I want to tell you how to be careful out there in the big bloggy world. Because the entire internet is made up of people that were once those students.

As a professional educator, I get to deal with these douche-bags every day. As a professional educator of educators, I also know a little about the psychology of these dudes’ thinking. (By the way, they’re almost always dudes, at least in the sciences. I don’t know why, and that’s not our topic. Women are probably just fundamentally smarter and less prone to wildly overestimating their own abilities for some reason.)

So, today we’ll look at Dunning-Kruger, or what pop psychologist Venkatesh Rao calls the Tragicomic Exasperation of Expertise. I want to put you on the look-out for thinking you know enough to evaluate a complicated financial play. In fact, once you start feeling dumb again, you know you’re on the path to enlightenment! Embrace your dumbness, because you’ll avoid doing stupid shit.

I also want to take the opportunity to kick peer-to-peer lending while its down, and hopefully tie the current mess Lending Club finds itself in to the personal finance blog world, Dunning-Kruger, and that annoying kid you knew from high school. Why do personal finance bloggers keep pumping up investing opportunities like Lending Club, Prosper, and PeerStreet when their actual expertise lies in software development and riding bikes?

Buckle up, because it’s going to be a wild ride.

I’ve read “A Brief History of Time,” so I’m sooper cereal.

Every year I see a new crop of physics freshmen at my university. Lots of bright kids excited about learning. Let’s face it, if you’re a self-selecting physics major, you’re pretty excited about the subject. No one chooses physics for the fame and money. That’s why we have engineering degrees.

In this group, there are always a couple of “those” students. Just so we’re clear, “those” students are found in every major and every class at pretty much every level.

Who are they? These are those people that sit next to you in class. They harumph and sneer during class. They get upset when the teacher goes too slow. They get upset with you or your classmates when you ask questions because you don’t understand something. They also often argue with the teacher. They’re arrogant assholes, basically.

If you talk to these students, you will learn that they think they already know everything. They had a class like this in high school, and they already learned all of this stuff. Why do they have to waste their time doing something beneath them?

They’ve read books by Brian Greene about string theory, for Flying Spaghetti Monster’s sake. Basic mechanics is beneath them because they’re going to solve much deeper mysteries. And they’re never going to do that sitting with a bunch of idiots.

I deal with these students daily, because in my field we get a particularly large percentage of them.

If you knew one of these folks, and always harbored secret fantasies about punching them in the face, then I have some good news for you. They almost always end up changing majors, because they fail their introductory courses.

These are typically people with a little knowledge but not quite enough to know that they really have very little clue what the fuck they’re talking about. They’re not metacognitively aware enough to accept they might need to learn new stuff to succeed.

This is common in fairly complicated fields. In the sciences, there is a wealth of books out there for the layman. In physics, you can read all about string theory, general relativity, the big bang, and nano-science. Their are plenty of books and websites that lay out the foundations in pretty clear terms using some really good analogies that the typical lay-person can understand.

But if you can’t do tensor calculus, then get the fuck out of trying to actually discover something new about the fabric of reality.

Basically, you can learn a lot about the “surface” of a topic. That understandable layer where everything is made simple for you through every-day analogy. You can learn so much, that you start thinking you’re pretty smart about the subject. Then, you talk to people with supposedly a little more knowledge than you and they seemingly know less. So you start thinking you’re the shit.

The investing world has the same issues. You can learn a lot about the “surface” of investing through blogs and books. Next thing you know, you fancy yourself an expert in the subject, start a blog or frequent a forum, and you’re off on your journey to personal finance assholedom.

Now, let’s not get too high-and-mighty with ourselves for not being assholes just yet, because each and every one of us will fall victim to this metacognitive trap at some time on some subject. Every. Damn. One of us.

What is Dunning-Kruger?

What I’m describing is what is referred to as the Dunning-Kruger effect. It is a well-researched cognitive bias that allows perfectly reasonable human beings to develop confidence in the face of their own ignorance.

The effect also has relevance to what is known as “impostor syndrome.” Many high achieving individuals have difficulty internalizing their own accomplishments, and often feel like frauds, even when every external indicator points to extreme competence. Plus, those that are very good at certain tasks underestimate exactly how skilled they are, and believe the task to be easy for everyone.

So basically, the ignorant are biased towards illusory superiority, and real-life badasses are biased towards illusory inferiority. Well shit. Doesn’t that suck.

David Dunning and Justin Kruger are psychologists at Cornell University, which makes them super smart, and probably feeling sorta like big phonies at the same time. David Dunning said this about the effect:

If you’re incompetent, you can’t know you’re incompetent. The skills you need to produce a right answer are exactly the skills you need to recognize what a right answer is.

Wikipedia further describes the effect as follows:

…people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it.” They therefore suffer an illusory superiority, rating their own ability as above average. This leads to a perverse result where people with less competence will rate their ability more highly than people with relatively more competence.

Or even simpler, thanks to Bertrand Russell:

The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt

Pretty impressive considering Bertrand Russell died 29 years before Dunning and Kruger published their first paper on the effect.

Dunning-Kruger and your money

Here’s a little crudely drawn graph to illustrate the point:

Idiots are more confident than experts.
Idiots are more confident than experts.

When you just start learning something about personal finance or investing or basically any topic, you have very little confidence in your own abilities. As you learn and gain experience, your confidence increases.

Interestingly, your confidence in these new skills goes up pretty quickly, because you’re excited about learning new things, you’re putting in a lot of time and effort into the learning process, and you’re super motivated.

As I described in my post on money obsession, it’s easy to let these new skills become an obsession and take over your thinking, even to the point of neglecting the work that you’re really good at.

At some point, you have almost 100% confidence in your newly acquired abilities. You’re writing a blog trying to help new people learn what you know. You’re on forums and Reddit responding to other people’s posts with confidence and assiduity. You get into little arguments about the 4% safe withdraw rate and the Trinity Study.

And you start recommending that people dump money into the equivalent of junk bonds with no historical yield data and an opaque resale market.

How many blog taglines say things like: “Helping others get out of debt” or “Teaching the simple way to invest” or “Learn to be smart with your money.”

Here’s mine: “Bearded or rich? I’ll take both. Dr. Beard is an internet sock puppet that wants to make you rich and fuzzy. He runs a silly little blog about beards and money.”

It’s a silly little blog because I don’t know shit about beards or money! I’d love to help you get rich, but fuck if I know how. Make more money and spend less. Seems simple. The details we’ll fumble through together, though, since this dude ain’t no expert.

Here’s the big problem, and it’s one we face in education in all subjects. Once you hit that 100% confidence or close to it, then you start to think you know a lot more than you really do, and you begin to fail to learn more. The worst part is, you don’t even really know that you don’t know enough.

As the little dotted line shows, experts exude less confidence, because they’re experts. That means they understand fully the tentative nature of knowledge, and the uncertainties within their own field. Put an expert with a thinks-they’re-an-expert, and all of those qualified statements and uncertainties pouring from said expert will only strengthen the idiots resolve that they are in fact the expert.

This is dangerous, because it can mean the only way they will learn is by losing a big chunk of their money.

In education, this is what we call an epistemological threshold. I talk a little more about this in my post on Epistemic Resources, but basically, experts look at problems in multiple epistemic framings, and novices get stuck in one. You’re stuck framing problems in one or two ways, but you don’t have the metacognitive awareness and/or the experience and/or the fundamental content knowledge to even see the existence of other framings.

Experts also recognize the tentative nature of knowledge. They are constantly looking for new data to expand their and humanity’s understanding. Novices, especially cock-sure novices, think knowledge is propagated stuff, and they have a lot of it.

You have to get over the threshold to truly become an expert. And once you do, you start to feel stupid all over again.

As I said at the beginning of this little post, embrace your stupidity because it will prevent you from doing stupid shit.

Also, you don’t need to even be an expert. It’s not required. Just don’t fool yourself into thinking you are an expert, because if you’re reading my silly little blog, then chances are you aren’t one. I only know of one major personal finance blogger that is an actual expert in finance with degrees and decades of experience, and he usually has some things to say that can contradict the rest of PF blog-land.

I’m not saying don’t read blogs, and I’m certainly not saying don’t start a blog. Personal stories are motivating, and watching others learn is the social proof many of us need to change our own habits. PF blogs can be powerful mediums for good, even when written by idiots like me.

Just be humble. Don’t be a personal finance asshole. Accept that you can be wrong, and more than likely are wrong sometimes.

Lending Club: the itty-bitty details

So let’s talk about Lending Club. I know that’s a bit of a weird transition, but you’ll see the connection soon.

Lending Club is a peer-to-peer lending company that acts as a market for people trying to get loans, and people trying to provide loans. People go to Lending Club because they need money. You give Lending Club your money to finance loans. You get paid interest. Screw the banks.

Sounds good on the surface, and the returns seem pretty good, too.

But the reality of Lending Club is much, much more complicated than that.

Let’s say you lend someone money through lending club. Those folks pay their monthly payment on time, and everything seems good. What happens if Lending Club suddenly went out of business?

You might think you still own the note, so you could just continue to collect the payments, and that’s that. But that isn’t actually how Lending Club is set-up.

For both Lending Club and Prosper you do not directly make loans to individuals. You buy notes issued by the company. There is no direct relationship between you and the borrower. Therefore, if Lending Club or Prosper go belly-up, you could end up with absolutely nothing. You could lose everything you have invested.

Don’t take my word for it. Ask Lending Club. From their 2014 SEC filing:

If we were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited and suspended or stopped. The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding Loans or the proceeds of those corresponding Loans. The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Even funds held by us in accounts “in trust for” the holders of Notes may potentially be at risk.

PG bloggy-land is full of diatribes about diversifying your investments, and steering clear of buying individual stocks. You might think your diversifying by buying a bunch of different notes from one of the P2P companies, but you really have all of your eggs in one basket. Lending Club’s.

This is kind of important right now because Lending Club’s CEO just resigned, and Forbes is reporting that he ain’t getting a severance package.

This means he was fired. For cause.

This should send shivers down the spines of everyone with money currently held with Lending Club. If they go down, then you can kiss your money goodbye.

Conflict of interest, cognitive bias, and rationalization from a position of illusory superiority

So why does it seem like every PF blogger has been totally pimping Lending Club and other P2P lenders. Why is Mr. Money Mustache pimping PeerStreet just this past week?


  1. We make money pimping them
  2. We don’t recognize these are highly complex financial instruments
  3. We don’t know enough to know we don’t know that

All of these P2P lenders have pretty lucrative referral programs. I could sign on for a company called Blackhawk right now and get $20 per lead I send them. I have no clue who this company is, but I could start pimping them for money.

Most PF bloggers actually use the services they pimp. I do. But that doesn’t necessarily mean that they understand them.

Read Miles Dividend M.D.’s post on Lending Club and P2P lending in general. Wouldn’t you like to see the whole prospect framed like that before jumping in with your money.

Us PF bloggers are good people. We want to help people. But when you combine self-interest, cognitive bias, and the easy ability to rationalize from a position of illusory superiority, then we can come up with some doozies.

We can see that the loans being made through P2P are a little more risky, but that’s baked into the reward: the larger gains we can capture in the form of interest. However, we don’t know enough about the specific notes themselves to realize there are other risks we aren’t being compensated for: the risk that particular P2P company dies.

It’s not that Bloggy-land is ignoring these risks. We just aren’t knowledgeable enough about FinTech in general and P2P lending specifically to even recognize such risks. We just see the risk of individual notes themselves going into default, because we get that.

The venture capitalists funding these companies recognize that risk. That’s because they’re either actual experts or have more money than they could possibly spend so why not search for a unicorn.

Look, Lending Club is probably going to be fine. It’s probably not a terrible way to invest a very small piece of your net worth. But I don’t have the slightest fucking clue how it actually works on the inside, so I’m steering clear, and the experts I do know have their concerns, too.

Some dude who paid off $56,327 in student loans in 8 months and now blogs about getting your financial priorities straight doesn’t know jack shit about promissory notes. I’m a college professor in science education. I don’t know jack shit about them.

Think about that the next time you read a blog. Think about that the next time you write a blog post. How much do you really know about the topic. Maybe you should learn more. What more should you be learning? What can you really teach someone?

Recognizing a threshold exists is the first step towards climbing over it

So here is the skinny: we’re all subjects to the Dunning-Kruger effect from time to time. We’re all capable of being personal finance assholes. We’re all capable of being blind to our own ignorance.

Accepting that fact and becoming metacognitively aware is our only path from cocksure dumbass to not-sure slightly-less-dumb.

Look over my post on thinking like a money expert and the specific example problem I provided on leasing a car. Always assume you don’t know shit. Always look for holes in your solution, instead of focusing on reasons your solution is right.

Also, always assume I’m full of shit, as well as every other blogger on the planet.

Otherwise, you risk falling into the metacognitive trap of being a perpetual idiot.

What do you think? Is the PF blogosphere a black hole of idiocy or a motivator and enlightener?

I’m an investing idiot. I know that, so I let my robot overlords take care of me. Betterment is my friendly robo-advisor that automagically invests my money in low-cost index funds with a smart balance figured out by fancy Ph.D.s, all based on my risk tolerance.

Another one of my favorite little robots is Acorns. They round-up all of my purchases to the nearest whole dollar and stash that little extra in low-cost index funds. It’s like a little value-added tax on everything I buy, except it goes to me instead of the government. Get $5 in your account for signing up today.

Dunning-Kruger: Reading blogs doesn’t make you smart

15 thoughts on “Dunning-Kruger: Reading blogs doesn’t make you smart

  1. I made four loans with Prosper ten years ago, when they were just getting started. I think two of them defaulted and two paid off. I swore off Prosper because of what you pointed out with Lending Tree – the loans are unsecured. You have no recourse if someone doesn’t pay. One of my defaulted Prosper loans was sold to a collection agency and I got $2.56 from the sale – on a $100 loan. (I had already received $23 in principal and interest payments.) I am always leery when I read bloggers urging people to get into peer to peer lending on these sites. They never mention the loans are unsecured. I do believe private lending can be lucrative, and I have been making private loans for almost 15 years – but the difference is I fund mortgages and have a legal claim against a piece of property I can foreclose on if the borrower doesn’t pay. (Also, the same issues that plague P2P lending also apply to any crowd-sourcing projects – you may put up your money and get nothing in return.)

    I think the number one lesson personal finance bloggers neglect is the importance of capital preservation.
    Shaun recently posted…Goal Update: End Of April 2016My Profile

    1. Dr. Beard says:

      After digging into it more this week, it’s actually worse than that at least for Lending Club (which is different than Lending Tree). Yes, it’s unsecured debt. That should be obvious from the high interest rates. But, more importantly, you don’t technically own the debt offered to the individual receiving the money. The best I can figure it, you own a note where Lending Club is the debtor. They use that money (minus some not-quite transparent spread, probably) to fund the loan to the final borrower. There is no legal agreement between you and the final borrower at all, and you have no real means of selling that note if you wanted to get out of it, other than through the Lending Club platform. So yeah, a few folks default. You know that going in, and I think Lending Club is pretty upfront about that from the get-go. But, if Lending Club goes under (25% drop in share price today!), then you could lose out on all the funds you have invested in their notes.

      It’s a chase for gains. If you’re rocking 7 figures or more in net worth, then capital preservation needs to be in your vocabulary. A little “play” money in P2P lending is ok, I guess, but not necessarily a good thing in the portfolio of the high school teacher that’s trying to also pay off student loans. You know, the audience for PF blogging.

  2. Great post! I feel it is the natural tendency to fall into overconfidence and as you put it above, the incompetent don’t know they’re incompetent.

    As a CPA and someone who’s read a few dozen books on investing, I would love to dive into picking individual stocks because I would be able to outperform the market. I know that’s my ego talking so I shut up, buy “boring” index funds, and get back to doing my actual job.

    This DK effect reminds me of the story of the man with a hammer. Once you solve one problem, your overconfidence can dip into new uncharted territory and you begin to see everything as a nail that can be hammered in.

    What you’re advocating is also one of the reasons I believe most people don’t learn about personal finance. They can’t admit to themselves they have been making mistakes with their money for years or for decades.

    Ignorance removal is a lifelong habit.

    The nice thing about building a secure future is that your future self doesn’t care how perfect you are. As long as you improve your situation, where you can and when you can, you’ll probably find yourself comfortably along the expert curve.

    You’ll have a circle of competence and if you’re smart, you won’t stray too far away from it.

    Thanks for taking the time to write this post! I got a lotta joy from reading it.
    Matt @ Distilled Dollar recently posted…Lessons from Charlie Munger on Divorce and the Death of 9 Year Old SonMy Profile

    1. Dr. Beard says:

      Thanks Matt.

      My general philosophy in life is to embrace the fact that I don’t know what I’m doing most of the time. This is exciting, because I always seem to be learning new stuff. It also makes me cautious, but not too cautious because I allow myself to screw up. It’s the best way to get through any threshold to learning.

  3. Will anyone ever reach a point where they are actually a confident expert in the subject? Because it sounds like with DK you’re either confident and an ass-hat who doesn’t know anything or an expert but you don’t realize it. Neither of those sound desirable, I’ve never been an expert on anything and now it sounds unappealing to after reading this article.

    1. Dr. Beard says:

      Experts are confident, they just aren’t 100% confident in everything they think and say. That’s because experts are able to recognize the tentative nature of the knowledge they have, as well as the limits of that knowledge. In fact, in my own research on the subject for science education, we find one of the defining qualities of an expert vs. a novice is exactly that ability to recognize limits of/to knowledge and the relative value of evidence. Basically, novices think in absolutes and experts think in scales and ranges. So experts are confident, they’re just more likely to point out where their reasoning could be flawed. Unfortunately, that gives dumbasses ammunition. Read Venkatesh Rao’s article I linked to at the top.

  4. Lot to think about after reading this one, I definitely have a douche sitting in the same row as me in a class I am taking (arguing with a guy who walked the walk for 40 years before teaching on the side)

    I agree with Matt above – people are scared to admit they are wrong and over compensate trying to prove themselves right.

    Thanks for writing this beast!
    Apathy Ends recently posted…Savings Rate as a BudgetMy Profile

  5. You have won the internet, Dr. Beard. Or maybe you really are an idiot. I don’t know.

    Just kidding.

    Like other readers, I really enjoyed this post. As someone who knows very little about lots of things, I share in your irritation on a daily basis.

    I was reminded of the 10,000 hours principle while reading your post. More bloggers should keep it in mind, IMO.

  6. Gotta love young guns who think they know it all. I think we’ve all been there before, knowing more than we really know. The only thing that can help folks learn is to go through their own experience if they are unwilling to listen. Everything is rational!

    Let’s hope LC and the industry survives. It’s a great idea. Just no confidence now.

    Financial Samurai recently posted…Sell Or Continue Renting Out My Home? Passive Income Goal In DangerMy Profile

  7. LOL this is awesome. There is a quote I heard once that is something like “A wise man knows how many books are not in his library” and your post reminded me of it. Very true that it’s easy to get distracted in this world of “experts.” I remember talking to a financial adviser once who told me he only invested in his 401k and yet felt he was qualified to make investment decisions with other people’s money. That bothered me a little.
    Millennial Boss recently posted…Til Debt Do Us Part No LongerMy Profile

  8. This is awesome and hilarious. Nice work! And now you’ve got everybody (including myself) to be self-conscious about what we’re saying, as we try to self-diagnose whether we’re ignorant assholes or unconfident pros. 🙂

    The Lending Club issue does sound scary to me, and I’m thankful I haven’t invested in it. I have invested in Prosper, though, although it’s still a fairly insignificant portion of my net worth because it’s been a trial run this past year-plus.

    The thing I liked about Prosper, that I didn’t see with the other P2P lending sites, is that Prosper seems to have thought out the possibility that Prosper might have to file for bankruptcy someday. Back in 2013, Prosper formed a new LLC and transferred all of its interests in the notes to that LLC, while retaining the servicing within the original corporation. All new notes since 2013 are held in the LLC. According to Prosper’s prospectus, the debt owed by the LLC to the lenders (us) is secured by the notes from the borrowers to the LLC. That theoretically means that we lenders are first in line to get paid if the LLC becomes insolvent. (Or second in line, really, because the bankruptcy lawyers are the first to get paid.)

    There’s no such thing as a perfect system, but the separation of the LLC and the corporation made me slightly more comfortable with the thought that if the corporation imploded, the LLC assets would be in a separate entity, with Wells Fargo as the trustee to service the notes. And if the LLC implodes, we stand a better chance of being paid at least some of our money back than if it were just a general debt of the company. This all assumes, of course, that we can trust Wells Fargo as trustee for the LLC assets.

    Anyway, there’s obviously a lot to it, and I feel like I have a pretty good general understanding of how it works, but I understand the reluctance to dip your toes in if you’re not totally comfortable with it, especially in light of the Lending Club debacle and the 2008 financial meltdown at the hands of the financial institutions and the bad actors running them. I wouldn’t invest huge chunks of money in P2P lending, but for my tiny sliver, so far I’m happy with the returns.
    Yetisaurus recently posted…Renovation Part 2: My Not-Vacation DayMy Profile

  9. Oh gosh there really was one in every class, several in mine actually! As my mum always says, “You’re in a very dangerous place when you think you know it all.” This post has just brightened a rather dull morning so far!

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