Ben Soppitt

Illusory Superiority and Poor Metacognition Keep You From Being Rich

38,000 people die in the US each year due to traffic collisions with a further 4–5m suffering serious injury. Driving is a very high-risk activity we all do voluntarily almost every day and barely think about it. The scary thing is that almost all of us vastly overestimate our skills at driving. 80% of men think of themselves as above-average drivers and yet 90% of traffic accidents are caused by human error.

Driving is an especially obvious and high stakes example — you know when you have been in a traffic accident. But this phenomenon is actually true of almost everything we do. It’s called Illusory Superiority and it makes us think we are better than most people at most things. There is a lot of academic study into this area and it reveals that people evolved numerous cognitive biases that may have been great on the African Savanna but actually make us commit behaviours that are deleterious to our health and wellbeing and those who depend on us in the modern world.

The Dunning-Kruger effect is a type of cognitive bias in which people believe that they are smarter and more capable than they really are. This bias is amongst other things related to a lack of metacognition. Metacognition is worth some further consideration:

“… the ability to step back and look at one’s own behaviour and abilities from outside of oneself. People are often only able to evaluate themselves from their own limited and highly subjective point of view. From this limited perspective, they seem highly skilled, knowledgeable, and superior to others. Because of this, people sometimes struggle to have a more realistic view of their own abilities”.

This is especially true of personal finance as it’s such a sensitive and private subject. Many people can barely discuss finances within their own families let alone with their wider network. It also comes with its own set of powerful emotions related to status and competition. It means that when we think about personal finance we have limited reliable comparison data and we vastly overestimate our own abilities and experience.

In a report, Developing Financial Knowledge it was found that “when asked about their level of financial knowledge, nearly two-thirds of individual investors rated themselves as advanced — a clear disconnect from their actual literacy scores”.

Let’s say for example that you decided to splash out on that Chase Sapphire Reserve credit card ($550 a year in fees) when you got your last promotion.

Whatever the reasons initially for choosing that credit card a lot of people react very negatively when confronted by the reality that it's a very expensive card with poor returns and its success has largely been dependent on status signalling. For most people, there are far better options that deliver a much greater return. But what you hear is generally “I travel a lot, lounge access, points etc.” essentially “maybe for other people, that’s true but not for me”. Remember 80% of men think they are above-average drivers.

Even when faced with overwhelming evidence to the contrary we are very often defensive about decisions we have made in the past. This is called choice-supportive bias. Once we have made a decision we find it very hard to be self-critical and change our mind regardless of the information we are given.

One strategy to avoid the Dunning-Kruger effect and other biases are, to be honest with yourself about your abilities and commit to ongoing self-education. The more we learn, the more we realize just how little we really know. This helps keep us grounded — and can help us make more informed decisions.

Great advice to be sure but easier said than done!

While you are at it you should also eat more healthily, be more active, phone your loved ones more often and be a better person generally. We all wish we could.

This is a rational approach to an insidious problem and we are highly irrational beings so that advice is of limited use.

A better approach we believe is a combination of brief rational reviews of your finances (it’s a boring subject and most people can only focus on it for a limited time) and wherever possible use technology to replace our faulty decision making and counterproductive behaviours. The more we can automate the tasks we should be doing but don’t the better off we will be and the faster our route to financial resilience.

Acorns really pioneered the use of this idea. The original concept was that once you had set up your account as long as you continued to use the debit card you signed up with you would be drip-feeding into an investment fund without doing anything else or adopting new behaviours.

Unifimoney has taken this idea much further. By integrating traditionally separate products into a single account it is possible to optimize for things like deposit interest (most working professionals leave far too much money in checking accounts paying little or no interest — with a typical top ten banks providing a desultory 0.01%) and rewards on credit card spend (with a flat rate cashback and 0% breakage i.e. the user gets 100% of the rewards automatically). It is also makes it possible to funnel small change from deposit interest and card spend into a low cost highly diversified investment fund.

Unifimoney users automatically and by default model best practices in personal financial management — effortlessly. Freeing them from both the stress of having to worry about managing/not managing their everyday money management as well as the psychological biases from which we all suffer and are often far poorer because of them.

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