You’re So Clever!

At a seminar recently, I asked for a show of hands for everyone who considered themselves ‘above average’ when it came to driving ability.

95% of the room raised their hands.  

Everyone chuckled as they looked around the room.

As you would probably guess, this result is statistically improbable, unless I happened to be in a room of Peter Brock relatives.

Students cram for exams because they believe extra study is not necessary given their superior level of intellect.

Healthy elderly people refuse to get their flu shots each year because they don’t believe they’re at risk.

Over years, people make thousands of stupid decisions, based on their own personal belief systems.

The consequences of a wrong decision don’t seem to matter either!

Just what is going on here?

Why can’t people be honest with themselves about their own abilities, and what effect this can have on their investing? 

Study after psychological study suggest that people’s estimations of their own abilities tend to correlate poorly with their actual performance.

In one 2006 study by Dunning, Heath and Suls, people correlated only 0.20 to 0.30 with performance on intelligence tests, in comparison to their expectations. (Correlation measures the relationship between two principles.

For example, a perfect positive correlation would be +1, and a perfect inverse correlation would be –1.

The correlation between how people expect to perform and how they actually do perform at the workplace hovers around 0.20 for complex tasks.

Clearly, we are fairly lousy at evaluating our own performance.