Dunning-Kruger Effect

The Dunning-Kruger effect is a cognitive bias defined by Wikipedia as the tendency for unskilled individuals to overestimate their own ability and the tendency for experts to underestimate their own ability.

Investors reviewing deals in an unfamiliar sector often consider their skills to be greater than they are.

Investors who are familiar with a sector often don’t realize how strong their perceptions are.

To overcome the Dunning-Kruger effect, an investor should slow down and take time to analyze the deal more carefully. 

Write out the assumptions about the deal and test each one to see if it holds true.

Investors often impute their own industry practices on the startup’s industry which does not always hold true.

Mentally assume you know less than you think you do.

Reach out to others who know the industry better to understand it.

 

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.