Dunning-Kruger Effect
The tendency for people with limited competence in a domain to overestimate their ability in it.
How it is identified
Test: self-assessed ability is highest relative to actual ability among the least skilled, because assessing skill requires the skill itself
Unit
qualitative
In depth
The mechanism is that the knowledge needed to perform well is the same knowledge needed to recognise poor performance, so a beginner cannot see what they are missing. In markets this is amplified by early luck in a rising market, which supplies apparent confirmation. It is why new participants often take the largest risks, and why experienced ones become more cautious as they discover how much is unknowable. The finding is more nuanced statistically than the popular version suggests, but the practical lesson holds: confidence early in a market career is not evidence of competence.
Worked example
An investor whose first eighteen months coincided with a 40% market rise concludes their stock selection works. Almost any selection worked in that period, and the conclusion cannot be tested until a falling market supplies the counter-evidence.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Dunning-Kruger Effect” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.