Over the last few months we have been talking a lot about our behavioral quirks and how they can impact our decision making, especially when it comes to our financial life. An interesting one from the field of psychology is the Dunning-Kruger Effect.
The Dunning-Kruger Effect is a disconnect between someone’s knowledge or skill and their level of confidence. Basically, as you begin learning something new, your level of confidence increases significantly faster than your actual knowledge. But wait it gets worse. If you don’t continue to increase your knowledge you can stay in that warped sense of reality for a long time. It’s why everyone who played high school football can clearly see what was wrong with the play calling during an NFL game even though they haven’t played in decades. This is also a common
We regularly see this play out with journalists who write financial columns. They will do two or three days of research on a specific topic and then fire off a hot take that often leaves a lot out. They just don’t know enough yet to see what they are missing. They can’t see the forest through the trees, so to speak.
Most recently an article came out from one such journalist stating that paying off your mortgage might be a better way to save than a retirement account. To illustrate his point, he compared national home price appreciation over two select time periods 1996 – 2007 (9%) and 2011 – 2017 (8%). He then said that if you used this appreciation assumption on a $315,000, 15-year mortgage, you will have more than $1,000,000 by the end. Here is a short list of what he overlooked.
- The cost of insurance
- The cost of property taxes
- The cost of home repairs and maintenance
- Something that happened in the housing market between 2007-2011 that would seriously skew this number… (historical average is about inflation)
- Getting the money back out of the house without additional cost
- Loss of mobility
- Concentrated risk and new geographical risk
- The average price appreciation includes many home improvements which aren’t free
I could go on forever, but you get the point. The same author wrote a post a week earlier on what it would take to save $1,000,000 in a 401k account. That limited amount of ammunition combined with recent home price figures led him to believe he was qualified to accurately make that comparison. Unfortunately, millions of readers were following along.
The author Malcolm Gladwell famously stated in his 2008 book Outliers that research suggests it takes about 10,000 hours of deliberate practice to become an expert in a field or skill. We would all do well to remember that when seeking advice.