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Is Delusion Ruining Your Life? Let’s Talk Dunning-Kruger

Updated: 06/24/2022 by Financial Samurai 115 Comments

Are you delusional? Let's talk Dunning-Krueger

If you are suffering from Dunning-Kruger, it means that you are suffering from delusion. And if you’re suffering from delusion, that means there’s a large disconnect between reality and what you believe.

Don’t let delusion ruin your life! Delusion is one of the key reasons people end up miserable.

When it comes to reaching financial independence, it is vital to be congruent with your beliefs and your true abilities.

Now that I’ve published my view that blogging is the best business in the world, I’d like to pump the brakes for the most enthusiastic of you who now think freedom from a tyrant boss is just around the corner once you start a website.

Anybody can start a business, but not everybody can generate enough money from their business to live a comfortable lifestyle. Capitalism, ironically, ensures that everyone will not be successful. Capitalism is what causes an uprising, even though our standard of living has never been higher!

I made the case years ago that real entrepreneurs are successful when I defined success as being able to generate at least the median per capita income for your city after three years of full-time effort. Those entrepreneurs who’ve been trying for far longer, while earning far less were clearly agitated by my stance.

But everyone knows the more you spin your wheels in the mud. You’ll get so trapped until one day the cannibals will hear your cries and start hacking off your limbs until you die.

I don’t want you guys to ruin your lives because of an entrepreneurial pipe dream. Therefore, let me share with you a warning story of what may become of you if you don’t recognize reality.

Dunning-Kruger: Delusional Entrepreneur In Full Effect

Let me share with you how delusion has hurt one aspiring entrepreneur.

I met a guy, let’s call him Roger, three years ago at Finovate, a financial innovation conference in San Jose. At the age of 35, he was an enthusiastic fellow who started a video website teaching people how to save money. It wasn’t a novel idea, but you don’t need to reinvent the wheel to create a successful business.

Over the course of the two-day conference I kept seeing him speak to female attendees, which was fine, if the ratio was relatively balanced. But these types of financial innovation conferences are never balanced. Women made up around 20% of the crowd.

During lunch break the next day, he asked if he could join my table. The table consisted of three guys and an attractive woman. I told him sure and he proceeded to gleefully show me all the cards he picked up from the women he was talking to.

“Sam, meeting people, especially women as a founder is awesome. I’m having so much fun!” Roger whispered in my ear, careful not to let the woman to my left hear. Clearly, she was his next target.

The Shifty Entrepreneur

Although Roger was a relatively normal looking guy, he was extremely geeky and socially awkward. He’s the type of scatterbrained person who speaks 90% of the time in a conversation and then wonders why the other side hasn’t listened to a word he said. There are many, many people like Roger at these conferences for some reason.

Roger told me he was dedicated full-time to his business and that he planned to stay with his parents in San Francisco while he worked on his startup. That’s pretty honorable given most guys in their mid-30s would do everything possible to stay away from mom and dad.

When I asked him where he plans to meet up with all the women he so proudly met at the conference, he mentioned, “at a bar or a coffee shop, of course!“

Despite knowing about my site, Roger never asked if I could help him spread the word about his business. I was waiting for the ask, but it never came because he was too excited to think about business at a business conference.

Three Years Later – Still Delusional!

Delusional Entrepreneurs And the Dunning-Kruger Effect

Fast forward three years later, I was walking down the street when I saw Roger at a coffee shop with a female friend I know in PR. Ah hah! So Roger was still at it, grinding away at his startup while trying to find love or excitement as a startup founder in San Francisco. Good for him!

I didn’t want to intrude on their conversation, so I let them be. But I did text my friend later that evening and asked her how her meeting with Roger went.

“Sam, you should have said hi!” she responded. “Roger is looking to sell his company. Know of anybody interested in buying?“

The first thing I always do when evaluating an online property is look up its traffic figures to get an idea of what type of revenue it could be generating. I’ve got a simple formula I use where I take the number of pageviews a month and multiply it by 1 – 10 cents to get the estimated monthly revenue range.

No Business Progress Three Years Later

After three years of working on his business, I was expecting Roger’s site to have at least 100,000 pageviews a month, equivalent to roughly $1,000 – $10,000 a month in revenue. Unfortunately, his traffic figure came out to just 1,200 a month, or only $12 – $120 a month in revenue! Holy crap. What has Roger been doing all this time, hitting on women instead of conducting business?

Before responding to my friend’s question, I asked her what else Roger was up to and she said, “He’s still living at home with his parents in San Francisco. He’s looking for a part-time PR person to help spread the word and has a bunch of free interns out of Asia he’s using.” She then proceeded to ask, “How much do you think Roger could sell his site for?“

I responded, “Maybe about $3,000 – $8,000.” The figure is based off roughly 2X – 5X annual revenue.

“WHAT?” she responded. “Why am I wasting my time with this guy? He’s never going to be able to afford my PR services. He made it sound like his business was doing well and just wanted to move on to something new.“

“Welcome to the world of smoke and mirrors! :P” I responded.

Related: How Much Can You Really Make Online?

Dunning-Kruger Makes People Ridiculous

On the one hand, I understand why Roger can’t let go of his business. It’s his baby, and nobody gives away their baby before adulthood. I’m sure Roger spent many hours building content and marketing his business. Further, his position as startup founder enables him to speak to plenty of women he would never have been able to speak to before.

On the other hand, if you are almost 39 years old, still live at home with your parents, and only generate ~$1,200 a YEAR in revenue from a business you spent three years of your life working on, then you’ve got to face reality that things aren’t happening. Roger deciding he wants to sell his company is a step in the right direction. However, his asking price is not.

“Roger told me he’s looking to sell for $3 – $5 million! ” texted back my friend.

Of course he said that, dear friend. He’s trying to impress you.

Delusion Can Hurt Your Finances

Roger believed in his failing business so much that his net worth is probably equivalent to that of a typical college student: zero-to-negative. Unless his parents have money, Roger is going to be in financial misery for the rest of his life because he’s actually been working on his business for five years. When I met him three years ago, he had already left his job two years prior to work on some prototype video content.

If you’ve been out of work for five years in your 30s, it is brutally hard to get back in, especially if you have nothing to show for your time away. It took me five years to find an ideal job as a varsity high school tennis coach after a couple hundred rejections from tech companies, despite having a site that’s doing fairly well.

Given everything is rational in my world, I’m perplexed by Roger’s situation. Perhaps his parents are rich since he did attend a private high school. But my friend says his parents didn’t have money when Roger was growing up. Then I found out what Roger could be suffering from based on the passage below.

Related: Reflections On Making Money Online Since 2009

The Dunning-Kruger Effect

Here’s a passage taken straight from Wikipedia:

The Dunning–Kruger effect is a cognitive bias in which low-ability individuals suffer from illusory superiority, mistakenly assessing their ability as much higher than it really is.

Dunning and Kruger attributed this bias to a metacognitive incapacity, on the part of those with low ability, to recognize their ineptitude and evaluate their competence accurately.

Their research also suggests corollaries: high-ability individuals may underestimate their relative competence and may erroneously assume that tasks which are easy for them are also easy for others.

Dunning and Kruger have postulated that the effect is the result of internal illusion in those of low ability, and external misperception in those of high ability: ‘The miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others.’

Dunning-Kruger Effect And Delusional People

The phenomenon was first observed in a series of experiments by David Dunning and Justin Kruger of the department of psychology at Cornell University in 1999.

The study was inspired by the case of McArthur Wheeler, a man who robbed two banks after covering his face with lemon juice in the mistaken belief that, because lemon juice is usable as invisible ink, it would prevent his face from being recorded on surveillance cameras.

The authors noted that earlier studies suggested that ignorance of standards of performance lies behind a great deal of incorrect self-assessment of competence.

Over-Estimating Your Competence Is Dangerous

This pattern of over-estimating competence was seen in studies of skills as diverse as reading comprehension, practicing medicine, operating a motor vehicle, and playing games such as chess or tennis. Dunning and Kruger proposed that, for a given skill, incompetent people will:

  • Fail to recognize their own lack of skill
  • Inability to recognize the extent of their inadequacy
  • Fail to accurately gauge skill in others
  • Recognize and acknowledge their own lack of skill only after they are exposed to training for that skill

Dunning has since drawn an analogy – ‘the anosognosia of everyday life’ – with a condition in which a person who experiences a physical disability because of brain injury seems unaware of, or denies the existence of, the disability, even for dramatic impairments such as blindness or paralysis: ‘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.‘”

Wow! This is exactly it! Roger fails to recognize that no matter how hard he tries, not enough people are coming to his site to provide him a livable income stream.

Yet, he refuses to give up after five years and get a job. If the women he keeps tricking to go out with him  would simply tell him the truth about his failing business, he might have not ruined his financial situation. But once again, confrontation is hard, even for parents who are housing a 39 year old man child.

My Own Delusions

I know some of you think I’m being too harsh on Roger, but it’s important to realize that because nobody cared enough for Roger, nobody was willing to tell him the truth!

I just don’t want any of you to turn out like Roger – delusional, and wondering why you’ve got nothing in your bank account in the second half of your life due to some fantasy. Given there’s no rewind button, we must speak with absolute truth.

Here are a couple of my Dunning-Kruger issues:

1) I believe all outcomes are correlated with effort, which is a failure in accurately gauging the skills of others. Often, my simple mental response to people who are struggling is, just try harder. I sometimes get frustrated when someone I care about doesn’t understand something or do something efficiently just because I can.

This is why I pray for patience all the time. I don’t want to be a tiger dad who causes his kid to rebel. Every failure I have is attributed to not trying hard enough, which traps me into forever trying hard despite having enough and wanting to rest!

2) I believe everything I write is logical, and therefore should be followed. How can people disagree with my thesis if they haven’t also spent hours researching and writing about a subject for the past eight years? But of course, you’ll read plenty of different viewpoints in the comments section that also hold true.

3) I believe the commenters who spit vitriol have something going on with their own lives. After all, happy people don’t attack strangers on the internet. But in reality, I might be suffering from Dunning-Kruger because I wrote an offensive article.

I’ve tried understanding other viewpoints with posts such as, Explaining Why The Median 401k Is So Low (to counteract my 401k Savings By Age post), and The Only Reasons To Ever Contribute To A Roth IRA (to counteract my anti-Roth IRA post).

Other Fun Dunning-Kruger Examples

Daenerys Targaryen, Mother Of Dragons? Nailed it!
  •  Thinking you’re an attractive person, thereby holding out for the perfect attractive someone, only to end up alone. Let’s face it. Most of us are not attractive! The sooner we realize this, the sooner we can recalibrate our expectations of finding the perfect match. Most of us are not witty or funny either. So if we are unattractive, boring, don’t know how to listen, and have an unsuccessful career or business, it’s time to shoot lower.
  • Being a 4.5 rated tennis player with a losing record, but only willing to play 5.0 opponents. Hi Ihsan!
  • Thinking you made a good real estate purchase when there are foreclosures all around you several years later.
  • Confusing brains with a bull market by buying health and fitness stocks.
  • Believing you wrote a best seller because your writing was so great instead of the fact that you piggybacked off your major corporation, like the New York Times.
  • Believing you are a great cook, despite your family throwing away the leftovers.
  • Believing you are an amazing CEO when your dad gave you the job.
  • Thinking you can consistently outperform the broader stock market.
  • Constant gamblers.
  • People who want to achieve financial freedom, yet don’t bother to track their finances.
  • People who don’t believe that fear is one of the biggest motivating factors for change.

The Best Way To Get Rid Of Delusion

I used to think the best way to get rid of delusional thinking is to be an entrepreneur or play sports. Scores don’t lie. If you lose 1-6, 0-6 you suck compared to your opponent. If you are only generating $1,200 a year in revenue after three years as an entrepreneur, your business model isn’t working. There’s nowhere to hide.

That said, I continue to see cases like Roger who aren’t willing to face reality all the time. I also continue to see great stories of triumph against all odds. Therefore, there must be a combination of humble realization and stubborn persistence in order to achieve your dreams. If you see a friend suffering from Dunning-Kruger, try to talk some sense before it’s too late.

For those who long to escape full-time employment, I strongly recommend moonlighting on the side while working a full-time job first. Even if you have to work from 7am – 7pm, Monday – Friday, you’re still left with 4am – 6am, 8pm – 4am, and all weekend to work on your side business.

Only after you’ve gained some traction should you consider taking the leap of faith and going out on your own. If you haven’t made at least a livable income stream after three years of working full-time on your business, it’s time to get a job or pivot to something new. After three years, employers begin to shy away.

For everything else, it’s important to find congruency in how you see yourself and how others see you. It’s vital to ask the people closest to you to give an honest assessment of your strengths and weaknesses. When there’s a mismatch, do your best to accept and rectify the situation. Otherwise, you might wake up one day wondering where it all went wrong!

Related posts about Dunning-Kruger and delusion:

Perpetual Failure: The Reason Why I Save So Much

Three White Tenants, One Asian Landlord: Story About Opportunity

For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience. 

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Filed Under: Entrepreneurship

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

Current Recommendations:

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher cap rates in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free.

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Comments

  1. Young and the Invested says

    August 29, 2019 at 2:34 pm

    I can’t tell if the chart you show illustrating the DK Effect prepared by artandtechnology.com is being ironic by using the incorrect homonym “No” instead of “Know” on their x-axis before “Nothing.”

    Reply
  2. Ariel says

    February 12, 2019 at 11:23 am

    I appreciated the article. I suffer from the 2 delusions you mentioned you suffer from. It’s kind of freeing. Thanks for including this post in your last newsletter.

    Reply
  3. beginner1 says

    February 10, 2019 at 6:32 pm

    Sam, I follow your newsletter consistently. In one of your post, you mentioned about starting own business is risky but a good strategy for financial independence. I do full time job and because of various reasons i started that adventure of my own business. Its been 1 year so far, business is not profitable yet but sales growing slowly. I will give 1 more year before call it a day.

    Reply
  4. Owen Franks says

    February 10, 2019 at 5:14 am

    Interesting article Sam. I think I’m a sufferer sometimes. I’m dumb enough to think I should give it a go.

    By your metric my blog is a failure. I write about Airbnb hosting at thecurioushost.com. I only get a few hundred visitors a month and have only generated about $310 after a year of writing.

    But I don’t only write intending to profit. I did it initially because I thought friends could benefit from the research and planning I put into setting up my own home as an AirBNB so I could go to Europe for four months. Then as I tried different experiments with it (such as trying to include bike rentals etc with the Airbnb) I found writing for an audience (even if an imagined one!) helped clarify my thoughts on such projects and force me to fully think the whole process through.

    I do want my writing to make a profit, but I don’t want it to replace my day job. I want it to provide one extra income stream among several others – my day job (lawyer), my rental property, my Airbnb property, and my writing.

    It’s fun to write. And it’s taught me a lot. Lawyers are notoriously bad at content marketing, and I think the experience will help up my game on that front.

    I plan to write more despite the fact I’m howling to the wind. Besides, I’m to dumb to know when to stop.

    Reply
    • Financial Samurai says

      February 10, 2019 at 6:12 am

      If you’re having fun writing your blog and not sacrificing your livelihood doing it, then it is a success!

      Reply
      • Owen Franks says

        February 11, 2019 at 9:25 am

        Yep – seek balance in everything I suppose. Thanks

        Reply
  5. Mighty Investor says

    October 30, 2017 at 12:37 pm

    Love the bracing reality of this post. I agree that sports and entrepreneurship will give you the harsh feedback in a hurry. And, of course, it’s hard to know if you are delusional or not until you try.

    So I agree that going for it on the side is the smartest course–and not advice I’ve always taken myself!

    Reply
  6. giulio says

    April 4, 2017 at 2:22 am

    Hi Sam! why did you try to join tech start-ups if your main goal was to stop being and employee and be free?

    Reply
    • Financial Samurai says

      April 4, 2017 at 6:36 am

      Curiosity and the desire to go on a new adventure. I found the perfect balance in consulting for several fintech startups for 15-25 hours a week a couple years ago instead.

      Related: A New Adventure Beings: Consulting For A Tech Startup

      Now, I’m coaching HS tennis and it is pretty fun!

      Reply
  7. theFIREstarter says

    April 2, 2017 at 11:10 pm

    Damn you FS!

    I’ve had a DK post in my drafts for about 2 years now and then you go and post this before I got around to posting mine.

    I may have to just face up to reality that I’m a crap blogger and give up.

    Anyone want to buy my site, will do a 1 million discount (that’s 20%) for FS readers? ;)

    Loved the post, I’ve heard the lemon juice story before, you really couldn’t mate that sort of thing up could you?!

    Reply
  8. AfterLaw says

    March 17, 2017 at 10:21 am

    Interesting post. I think even outside business, our popular culture encourages inflated self-worth. There’s lots of trash-talking and braggadocio in schools, and I wonder whether kids ever grow out of it. It’s cute when a 6th-grader thinks he can be an NFL runningback, but it becomes delusional when he’s second-string on a high school team and still telling himself that — leading him to neglect more fruitful pursuits. Parents can be the worst, as lots of people on here have commented. My mother totally encourages/enables my sister to keep spending her small income (from an unrelated part-time job) to produce her terrrrible art, which never sells because it’s terrrrible. Parents are not being helpful when they abet long-term failure, but I think D-K inability to perceive incompetence in one’s self can be even stronger with reference to one’s children! I think, as you point out, some honest criticism would be helpful, and not just in income and finance but in our culture at large. People need to see the nobility in admitting limitations, then managing an appropriately frugal financial life, and an appropriately modest personal life.

    Reply
  9. ZJ Thorne says

    March 9, 2017 at 9:04 pm

    I’ve known many dudes like Roger. There’s no getting through to them until they are ready to grow up and face the things about them/their businesses that need to change.

    Businesses take time to grow, but few of them require spending so much time pitching to pretty women.

    Reply
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