When it comes to investment psychology, many financial content creators say that the biggest enemy of an investor or trader is greed (greed) or fear (scare).
But here I want to provide an alternative psychological condition that must also be wary of when learning to invest. This phenomenon is called the Dunning Kruger Effect, whose graph I describe as follows;
The Dunning Kruger Effect is basically not a phenomenon that is only limited to the investment world. This is a cycle that describes how a person learns or learns something new.
4 Stages in the Dunning Kruger Effect
In Dunning Kruger Effects, someone who learns something new such as investing, photography, or some other field, usually seems to get enlightenment or feel enlightened. It happened because of feeling excited or high interest. So not infrequently they will find out as much as possible about the new thing and feel the smartest.
Thus, at the first stage they will feel that they already know everything. They will tend to forget that they are in the learning stage. This is where ‘the peak of ignorance’ occurs, in which people usually find it more difficult to be told, feel that they are the smartest, underestimate other people, and so on.
Looking back, I too have been in a phase like this. When I started learning about photography, learning about religion, or when I was learning about investing. Those times happened 2-3 years ago, where I was at that stage and felt the smartest, to think other people were dumber than me.
This is where the most dangerous stage when someone is new to the world of investing, especially trading. For example, someone who is just learning about technical indicators, trading psychology, then he immediately puts it into practice without risk management and financial management being matured first, until it ends close.
In this second stage, occurs when a person feels like a failure or realizes that he has not mastered anything. From there will begin to arise shame or a decrease in self-confidence. For example, feeling at the same time realizing that in fact he is still stupid and there are many who are smarter.
If you know that I was on hiatus, maybe at that time I was experiencing and was in this phase. At that time I had lost confidence, felt stupid, wanted to stop writing, and ended up learning more. For knowing that it turns out I’it’s nothing’.
But be aware that this is a good phase. When someone has entered this second stage, then he seems to be starting everything from scratch. Starting to realize that what happened before was just an illusion and sheer arrogance.
Then after passing the second stage, one will start learning again, until the stage of enlightenment new. Where at this stage, he will again find enlightenment through reflection on all the mistakes and stupidity that has been done before.
From there will arise a new understanding of the truth that should be done. But not to the stage as before, which is to feel smarter, to feel superior again. Because they have experienced this before and know the consequences if they make the same mistake.
This fourth stage is the phase commonly referred to as the teacher stage. Where someone who has reached this stage has relatively finished his learning period, is aware of his mistakes, but never stops learning.
For me personally, I have not dared to mention that I am already at this stage. I think, with all the circumstances and conditions I am in today, I am still in the third stage and will soon move on to the next stage.
Someone who is in this fourth stage, is sure that even though he understands everything, there is always something new to learn every day. This is called continuous learning or continuous improvement.
I’ve also created content related to work culture in my office, called KaiZen. This is closely related to the fourth stage, where people who are already proficient at doing something or know something about something, still have to try to become a better person from day to day.
The connection between the Dunning Kruger Effect on investment is that we are able to realize that as great as it is to be an investor or trader, we must always try to be humble. Then, realize that there are always people who are far greater than us, and realize that there is always something new that we need to learn every day.
That’s the Dunning Kruger Effect. The most important implication of all of this is that if you are someone in the first stage, get out as soon as possible.
Try to reflect on what stage you are currently in. Are you really in the fourth stage, or are you still stuck in the first stage? Be honest, because only you know it.
My hope is that we can all struggle together in our respective stages and phases, to get to another, better stage.