The Dunning-Kruger effect is a psychological bias where a person with low skill or knowledge about a certain field fails to see their incompetencies while a person with adequate skills or knowledge. This phenomenon was studied in a research done by David Dunning and Justin Kruger.
We've all entered this state on more than one occasion. We watch a single youtube video about a certain topic, then we proceed to debate our friends about it like we've studied it all our lives. In fact, think about it, you rarely ever see a climatology expert debate in social media about global warming. Instead, you see your neighbor typing 5 paragraph replies to a facebook comment.
This is also very evident in video games. Players with inadequate skill fail to improve because they fail to see their flaws. They have a misconception that they're already playing at the top-tier level cough 2K Mmr in DOTA cough.
Why This Is Important in Investing
As an investor, you might get a false notion that you are above everyone else. You have your fancy charts on one monitor and the news feed on another. You think that you've watched enough youtube videos that you're basically immune to making mistakes. This overconfidence may lead to some very very very very painful losses. So before you make that mistake, analyze your flaws and work to improve them.
This is especially true in the cryptocurrency market. The steep highs and lows are death traps for new investors. One might have been lucky and entered at the time a high was about to start. Thinking he was the best investor in the world, he decided to put his life savings in it. Only to be met with the harsh reality that everything eventually falls down.
