Little Bit of Info is A Lot of Bit Dangerous

Little Bit of Info is A Lot of Bit Dangerous

A few years back, I had a client call me in a panic. It was the early days of COVID, markets were imploding, and he had just read three articles and watched two hours of cable news. He was certain — certain — that this was the beginning of a decade-long bear market from which we might never recover.

He wasn’t uninformed. He was just informed enough to be dangerous.

That’s the paradox I want to talk about today.

The Dunning-Kruger Effect

There’s a fascinating psychological phenomenon called the Dunning-Kruger Effect that explains exactly what happens to all of us — me included, hand firmly raised — when we dip our toes into a complicated subject. Here’s the condensed version:

Stage one: You learn a little. Suddenly you feel like an expert. Psychologists actually call this the “Peak of Mount Stupid,” which I love because it’s so perfectly named. You’ve read one book on investing. You’ve skimmed a few articles on nutrition. You’ve watched a documentary on the housing market. And now? Now you’re ready to blow up your financial plan or go full carnivore diet.

Stage two: You keep learning. And things get worse before they get better because the more you know, the more you realize how much you don’t know. The subject gets more nuanced, more complex, more humbling. This is actually where most people hire a financial advisor. You’ve gone far enough down the rabbit hole to understand you’re in over your head.

Stage three: You develop genuine expertise. Real confidence, paired with real humility. You know what you know. You also know what you don’t know. And you know the difference between the two.

There’s a great scene in Good Will Hunting that captures this perfectly. Matt Damon approaches a pompous grad student at a bar who’s using half-digested academic theory to impress a girl. Damon quietly eviscerates him not because he read more, but because he understood the difference between absorbing information and understanding something deeply.

The problem isn’t that people go through this curve. We all do. The problem is that most people refuse to recognize where they are on it.

I’ve seen this play out in every version of a headline-driven market panic you can imagine that instantly has people picturing some dystopian society. Trump election fears. Post-COVID apocalypse projections. War-triggered end-of-civilization scenarios. Every few years, a new catalyst, a new round of anxious calls, a new round of people absolutely convinced they’ve figured something out that three decades of market history and professional analysis somehow missed.

They aren’t stupid. They’re just on the Peak of Mount Stupid.

The smartest thing any of us can do is get very honest about where we sit on that curve — and then seek out expertise in the areas where we’re either unwilling or genuinely unable to develop true competency. That’s not weakness. That’s what smart people actually do.

Which is, I’d like to think, why you’re reading this in the first place.

As always, stay wealthy, healthy, and happy.