Why should I be so confident when helping with other people's problems? For one, because we all are pretty confident in those situations. It's always easier to see the clear answer to someone else's problems. They can't see the forest for the trees, but we can. They're working under a variety of biases, and often don't realize it. But we, their trusted friends and advisors, see them clearly and can guide them to an optimal solution.
They are having a hard time selling their house because they've anchored too high, based on what they paid for it five years ago.
Or maybe your friend is falling prey to the sunk cost fallacy, and will throw good money after bad on that old clunker he still drives around.
But there's another psychological bias at play here, and it's with the jerk who's giving out advice left and right. I suffer from the Dunning-Kruger effect. (Don't worry, you do, too. See how confidently I said that?) It's a bias where an unskilled amateur overestimates his expertise in a given area. You know, like when a guy who just barely earned an English degree and has no formal training in finance writes a blog about personal finances, and somehow misses that it is rife with run on sentences.
The Dunning-Kruger effect illustrates that most people overestimate their abilities. While top performers tend to underestimate their abilities by a small amount, the majority of people end up overrating their own skills, resulting in the odd tendency for everyone to think they're above average. This unfortunately results in a sad truth: we are all confident idiots. Worst of all, the less competent we are, the more likely we are to have a crazy, contrived confidence about a subject.
Seeing how I'm usually pretty confident with all things finance, might I actually be that terrible, cocky douchebag that Dunning and Kruger are trying to warn us about?
It is bad enough that I'll tell friends and loved ones about how to budget or reduce their spending since, you know, there's a whole field of professionals out there who actually know what they're talking about. But I actually have the gall to write about this stuff anonymously, to anyone who happens to have a computer, and is unlucky enough to stumble across this little blog. (You play a role too: you're brave enough to read this stuff, and maybe foolish enough to put it into action.)
What's most interesting is how easy it is for me to try to solve other people's money problems. I really like telling a certain family member about how he shouldn't be raiding the money is his 401k to pay his income taxes, how he should be adjusting his W-4 withholdings so he doesn't end up owing five figures in federal taxes again next year, and how he really needs to be paying down all his consumer debt. I honestly feel like this is the right advice, and even feel compelled to provide it...without any invitation or solicitation whatsoever.
But why? I'm just some guy. I'm no CPA. No CFP. Sure, I read some blogs and, in relative terms, seem to be doing well with money.
The comfortable approach is to wonder if, you know, maybe I am qualified. Maybe I'm in that top 25% of people who actually underestimate their abilities. We paid off all our debt. We have some investments. And lookie here, we even have a budget in Microsoft Excel. Besides, you don't always need some fancy letters after your name to be right. Right?
And that's the crux of the Dunning-Kruger effect. It's the novice's unwarranted confidence in a subject he knows only a little about: enough to be dangerous. It turns your weekend warrior into something much worse: the modern jackass.
This points me to believe that you probably shouldn't be reading this blog. It might be time to unsubscribe, brave reader. At the very least, the blog should come with a warning.
I write because I like writing. (Kind of.) But also because I think that maybe there is something to the way we're sprinting to financial independence, and that other people might want to do the same. Maybe these words get people to improve their financial lives, or inspire them to get rid of debt like we did, or to pay off a mortgage, or to retire early. Maybe this blog helps. It's possible.
We don't give a lot of thought to the possibility that there might be some harm in there, too. What if someone retires early due to these sort of amateur financial blogs, and it ends up being a really bad decision?
So here's your warning, folks, and you only get it once. I do not know what I am doing. I am not a certified financial planner, though I play one on the internet. If you actually want to get ahead in this world, you should seek advice of a qualified professional.
Maybe I should, too.
*Photo is from Christopher Paul at Flickr Creative Commons.