Overestimating our competence, we sometimes do stupid things.
Approximately 20 years ago, the Anaheim Ducks mascot did not quite make it when he tried to jump over a wall of fire on the ice. Wild Wing was okay though because a group of cheerleaders quickly pulled him out of the flames. As the NY Times told us, “This story of Duck a l’Orange County is no canard. A duck could get fired for this, or at least demoted to the Rotisserie League.”
I thought Wild Wing’s miscalculation was a good example of the Dunning-Kruger effect. Also called a “confidence-skill disconnect,” Dunning-Kruger looks at people who fail to recognize that they know little about a topic and, as a result, rarely try learn more.
The FINRA Financial Literacy Survey
Similarly, many of us have a “confidence-skill disconnect” when we assess our financial literacy.
Responding to a 2015 survey from FINRA, 76% of the participants rated themselves high on a financial literacy scale. Similarly, a whopping 81% said they were good at handling their everyday financial activities. And yet, the same people mismanaged their credit cards by paying the minimum amount, owing late fees, and using the card for cash advances.
With 7 the highest score, the red, yellow and gray slices show 80% of the survey respondents had a confident image of their financial literacy:

Below, you can take a six question FINRA financial literacy quiz. The answers follow the last question.
Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
- More than $102
- Less than $102
- Exactly $102
- Don’t know
Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?
- More
- Same
- Less
- Don’t know
If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
- Rise
- Fall
- Stay the same
- No relationship
- Don’t know
True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
- True
- False
- Don’t know
True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
- True
- False
- Don’t know
BONUS QUESTION: Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?
- Less than 2 years
- 2 to 4 years
- 5 to 9 years
- 10 or more years
- Don’t know
Answers: More than $102; less; fall; true; false; 2 to 4 years.
Our Bottom Line: Human Capital
Just like a factory has more capital when we add equipment, so too do people when they get more education. As a form of human capital, financial literacy is knowledge that many of us need to boost.
Otherwise, we might suffer from the Dunning-Kruger effect.
My sources and more…The perfect springboard for financial topics, a James Surowiecki column at the New Yorker introduced me to the Dunning-Kruger effect. My next step was a wonderful Scientific American article and the NY Times for the Wild Wing story. Finally, the perfect complement is the FINRA financial literacy study and the original FINRA quiz.