Sunday, November 16, 2014

Confidence, Knowledge, and Ignorance

I was just reading an essay by psychologist David Dunning at Pacific Standard about the phenomenon known as "confident ignorance" or "inappropriate confidence", on which he is a big expert:
In many cases, incompetence does not leave people disoriented, perplexed, or cautious. Instead, the incompetent are often blessed with an inappropriate confidence, buoyed by something that feels to them like knowledge. . . . A whole battery of studies conducted by myself and others have confirmed that people who don’t know much about a given set of cognitive, technical, or social skills tend to grossly overestimate their prowess and performance, whether it’s grammar, emotional intelligence, logical reasoning, firearm care and safety, debating, or financial knowledge. College students who hand in exams that will earn them Ds and Fs tend to think their efforts will be worthy of far higher grades; low-performing chess players, bridge players, and medical students, and elderly people applying for a renewed driver’s license, similarly overestimate their competence by a long shot.
There has to be something to this, as I have written before.  But as I continued through the article I came to think that Dunning is lumping together unrelated things, especially different meanings of "know" or "understand," and that he is treating something profound and complex and as a parlor game.

Dunning spends the first several paragraphs on a little exercise carried out by Jimmie Kimmel at the South by Southwest music festival in Austin, in which his interviewers asked random music fans about imaginary bands and got confident-sounding, impressively detailed responses. I submit that this has nothing to do with confident ignorance. Did any of these people really think they had heard of these bands, or did they know they were making it up? Did they think this was some sort of quiz about music, or did they see it as a sort of buzz-generating exercise that they were happy to participate in for the fun of it? Were they just joining the conversation because it seemed like the right thing for music fans to do? To compare the riffs of these hipsters on the prowl to, say, incompetent surgeons is silly.

There is a more important side to this, which is that when put on the spot we humans hate to admit that we don't know. This especially true when the topic is one we care about. Point a camera in the face of a music fan and he or she is not likely to admit ignorance about what sounds like a hip new band. This may be a real problem in some situations, say when an arrogant doctor is confronted by a patient about an unfamiliar disease. But it is not at all the same as believing that you know what you don't.

But Dunning does have more substantive examples:
Among its many causes, the 2008 financial meltdown was precipitated by the collapse of an epic housing bubble stoked by the machinations of financiers and the ignorance of consumers. And recent research suggests that many Americans’ financial ignorance is of the inappropriately confident variety. In 2012, the National Financial Capability Study, conducted by the Financial Industry Regulatory Authority (with the U.S. Treasury), asked roughly 25,000 respondents to rate their own financial knowledge, and then went on to measure their actual financial literacy.

The roughly 800 respondents who said they had filed bankruptcy within the previous two years performed fairly dismally on the test—in the 37th percentile, on average. But they rated their overall financial knowledge more, not less, positively than other respondents did. The difference was slight, but it was beyond a statistical doubt: 23 percent of the recently bankrupted respondents gave themselves the highest possible self-rating; among the rest, only 13 percent did so. Why the self-confidence? Like Jimmy Kimmel’s victims, bankrupted respondents were particularly allergic to saying “I don’t know.” Pointedly, when getting a question wrong, they were 67 percent more likely to endorse a falsehood than their peers were. Thus, with a head full of “knowledge,” they considered their financial literacy to be just fine.
But what does "financial literacy" mean? Does it mean a detailed knowledge of various markets and instruments? Presumably that is what is being measured by these tests. I would note first that it is assuming a lot to accept that this is actually a good test, because most tests are terrible. Several years ago a friend of mine was preparing for the exam you had to pass in Virginia to be a securities broker, and he explained that this involved a lot of extra studying because the test covered everything except what you actually had to know to sell stock.

Even if it is a good test and covers the sort of stuff you ought to know to be a homeowner and mutual fund investor, that just gets us to my real question: what does "knowledge" mean? Many people are dismissive of the sort of facts covered by these tests and much more interested in a sort of intuitive grasp of things that you can only get from experience. You may "know" that it is possible to lose everything if you aren't careful, but do you really understand what that means if you haven't been through the experience? This could well explain why bankrupts rate their own financial knowledge so highly -- you may have the theory, but they know the practice, and they think that their hard-won expertise trumps your book learning.

Consider the 2008 crash. Those people who pulled out of the markets in time, or who were dismissive of the bubble and the talk about soft landings, were not more knowledgeable about the ins and outs of derivatives than those who stayed in. In fact some of them (like Warren Buffet) made a show of their ignorance, stating publicly that they didn't understand this stuff and so weren't going to bet their money on it. Most of them (like me) were just going on a sort of gut feeling that this was bound to end badly, based on mistrust of Wall Street insiders and the experience of seeing similar bubbles collapse in the past. At the time I knew next to nothing about mortgage-based securities or shadow banking, and the people who did were the same ones who created all this stuff and bet their companies' futures on it.

Who was knowledgeable? Who was foolishly confident?

That may be too big and vague an example to made these distinctions clear. But how about this: I know a lot about deer hunting from a ecological perspective and I could tell you about appropriate deer populations for various environments and how much hunting would be necessary to achieve them, and so on. But since I have never pointed a gun at a deer and pulled the trigger, do I really know anything about hunting?

Can you really understand love without having fallen head over heels? Can you understand poverty without having been poor?

To know means different things to different people in different situations, and to treat the whole apparatus of human understanding as a bag of facts is a terrible mistake. Yes, sometimes people think they know a lot more than they do. But other times they have something completely different in mind than psychologists with multiple choice tests: the wisdom of experience, or something social and shared like the cant of music fans who understand that keeping the conversation flowing is more fun than getting the facts straight.

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