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I love me some science and psychology! I stumbled across an “effect” in the world of psychology and did more research on it… and wow, all I can say is it 100% (probably even more) applies to all of us in the challenging world of trading. In fact, it’s a phenomenon where if you are being honest with yourself, it has happened to you or who knows, may be happening right now. To clarity, just because there has been money spent at a university to do research and study a topic does not mean you should blindly accept the results of it; however, given I’ve been around since 2013 and have interacted with 1,000’s of people at this point, I can say with full certainty that this “effect” is alive and well within the financial markets. I learned a ton from it and I’m confident you will too, so let’s get to it and talk some science and trading!

Transcript

Clay: This is the Stock Trading Reality Podcast, episode 280.
Announcer: This is the Stock Trading Reality Podcast where you get to see the realistic side of a trader’s journey. Get inspired and stay motivated by every day normal people who are currently on their journey to trading success. And this is your host. Are you aware of how expensive LEGOS can be? He was shocked. Clay Trader.
Clay: It’s actually very crazy, totally caught me off guard. One night the kids, they’re in to LEGOS, in fact I think there is a fun fact about Lego Masters so they totally got into that. I mean they already liked Legos before that but they just love Legos like I think most kids out there. “Hey dad can we see some Star Wars Legos?” So of course I pulled up Amazon a quick search for Star Wars Legos and wow my mind was blown.
Clay: Now I want to make a quick disclosure up front, I’m not saying that these are overpriced I’m not saying that they’re a ripoff. I just don’t know exactly what goes into these legos. What makes something more valuable or I should say more pricier than something else. I mean I know what legos are, legos are fun but I mean am I some sort of Lego aficionado? I have no idea so I am talking from a position of ignorance here.
Clay: My point here is again not that I think they’re even overpriced because I don’t know what their value and all the ingredients if you will that go into coming up with the recipe for legos pricing. I just didn’t know they got that much and I’m looking at one right now. So the Lego Star Wars A New Hope Imperial Star Destroyer, $900. $900. Now granted lets see it’s got 4,784 pieces which that sounds like a lot of pieces to me but again, maybe this is still child’s play.
Clay: For all I know maybe there’s some 10,000 piece set out there. I don’t know but I just didn’t realize that legos were that amount of money and maybe that’s a great value I don’t know but it just caught me off guard and I mean the kids I’m still trying to teach them money. I mean they’re at the stage where $100 is like “Oh wow 100 is such a big number.” But to then try to communicate well $900 is actually nine 100s and they just kind of stare at you, “So can we get it?” No. I’m not going to get $900 of legos right now. Caught me off guard, but maybe you are well aware of that but for me I was just wow. All right. Kids you better get out there and start knocking on some doors to mow some lawns and shovel some driveways because that’s pretty intense there.
Clay: But as you I’m assuming could tell by the title of this podcast we are going solo again and maybe you’ve noticed a pattern but I’ve got enough good positive feedback where I know that these are popular enough, maybe not necessarily to do them every single week but I have been trying to do them basically one every four episodes, right around there. Four or five episodes, just throw something out there and yes because I know many of you enjoy them. I know some of you maybe they’re not your favorite but that’s why I’m only doing them every now and then.
Clay: But in all actuality it’s really helping me out too, to talk out loud through these things and to just learn because that’s what I’m doing too is I’ve noticed that things I’ve described I’ve had to coin my own terms to, which you’ve seen in the name of the podcast here but there’s actually real science. There’s psychology, there’s actual terms for what I just described and in this case, fool’s gold. If you’re a long time listener then you’ve heard fool’s gold come up time and time again. Stories of it, examples of it, warnings of it. But we’ve never actually assigned the scientific term to it, which I didn’t know existed until a few weeks ago until I came across… I don’t even remember how I came across the term but then I researched the term and the more I learned about it. Which is why I’m benefiting from these hopefully as much as you are.
Clay: Combining and using science and trading in combination because that can be very beneficial. But the more I researched and learned about them I’m like, oh I totally understand how this works. I see it all the time. I didn’t know that it was the term for fool’s gold that I’ve been using, but let’s talk the science of fool’s gold. And once again, I fully admit that, up until this point it’s a situation where, you can say, well Clay, that’s just anecdotal evidence, sure you experienced, sure you have come across many people, sure many people you’ve interviewed have displayed these attributes of fool’s gold.” But I mean that’s just all anecdotal. I mean, it’s not like there’s any science, it’s not like there’s any experiments. It’s not like there’s any money that’s been poured into researching fool’s gold.
Clay: But there has. There has been lots of money poured into it. There have been scientific papers written on fool’s gold. Again, they’re not using the term fool’s gold. Maybe for some of you well versed in psychology, you know the effect I’m about to talk about. But at this point I can now say and… this is what just gives me that much more confidence to… I mean I don’t want to say be a jerk to somebody but just speak with that much more authority of, hey listen, you’ve got some fool’s gold going on, but don’t take my word for it, go out and research this term. So what is the term? Well from Psychology Today… Now there’s many other resources out there if you want to do more research into it and just learning about it. But it is called the dunning kruger effect.
Clay: Dunning kruger effect. The name comes from the two psychologists that did all the research on it and won awards about it and all of that. But like I said the article here is just coming from Psychology Today. And for those of you that may be new to trading, not necessarily to stock trading, really any trading, if you’ve never had money on the line, you’re probably just not aware of how important, how big psychology actually is but you can take my word for it. Or you don’t have to believe me at all, I’m not offended, I get it. I could be some random person you stumbled across and you’re giving the podcast a try, thank you very much by the way. But as soon as you put money into a trade you’ll realize how big of a game of psychology it really is. You’ll meet all sorts of voices in your head.
Clay: But here’s the extra tricky thing about psychology in trading, is having real money on the line is going to be a big psychological battle. But as you’ll see here. Even the psychology before the trade and after the trade can be just as difficult and just as damaging. Now this dunning kruger effect does not apply to trading, per se, but as I read through it, especially if you have really any experience at all. Maybe you’ve been in chat rooms, you’ve been on social media, you’ve been on Reddit. Oh goodness, don’t even get me started on that. But you’ve probably seen people where the dunning kruger effect is just completely reeking havoc on their life. And as you’ll learn, it’s pretty cruel because there’s not much you can do to let them know, hey, this is what’s going on, because the way the effect works, it’s basically like a vicious cycle where you really just don’t know it.
Clay: And you can’t really know it based on how it all works. So let’s get into this. And again, I may insert in some trading terminology here which is full disclosure on my part. Not part of the article myself. But I swear if I didn’t tell you that this was not a trading based article then I could read through this and you would have no idea that I had inserted a bunch of stuff because there’s so many things here that just fit perfectly.
Clay: So the dunning kruger effect. The dunning kruger effect is a cognitive bias in which people wrongly overestimate their knowledge or ability in a specific area. This tends to occur because a lack of self awareness prevents them from accurately assessing their own skills. As I read that, I mean, there’s so much to unpack in that in and of itself. And this is something where I talk about it all the time and it’s reassuring to me, I now will speak that much more boldly about it because I have that much more science in my corner.
Clay: But, I talk about it all the time. Self awareness, self awareness, you got to be self aware. And how is this all occurring, well, it’s because a lack of self awareness and then prevents them from accurately assessing their own skills. And that in and of itself is so important. Let’s just keep going because I already want to start to unpack things but there’s all sorts of stuff in here. So, the next little sub-section here is understanding the dunning kruger effect. The concept of the dunning kruger effect is based on a 1999 paper, research paper, as in, there is literally, and just to set the context here of a research paper. Research papers are not free. Somebody, usually a university say’s, you know what, I want to learn about this, you know what, let’s do more research into this.
Clay: So there is money that is… People are putting their money where their mouth is to do these research papers. These things don’t just grow on trees. These things just don’t happen. Now I should also note that just because somebody spends money to do a research paper, does not necessarily mean the research paper or the research that comes from it is all of the sudden iron clad fact. I’m not saying that either. But I’m just saying that there has been, there is science behind this, and part of the science is people investing. People paying to get this research done. And as you’ll see how things… I mean based on the definition I’ve already given you, if you have, like I said, any experience at all in the world of social media, and you have experienced pain. You know what it takes. You’re probably like, “oh yeah, I’ve seen that quite a bit, I don’t need you to tell me that there’s science, I don’t need you to tell me that there’s money put behind it, it’s totally true.”
Clay: So, point here being though, this is straight up science so this is why… science in trading. When you can find things that might give you a little better understanding and edge, it’s important. And this is [inaudible 00:10:41] coming from 1999. So there is a pair of psychologists, David Dunning and Justin Kruger. The pair tested participants on their logic, grammar, and sense of humor and found those that performed in the bottom quartile, rated their skills as far above average, excuse me. Not above average, far above average. Let me say that again. They did this research and part of the research they found that those that performed in the bottom quartile. So those that were not good rated their skills as far above average.
Clay: For example, those in the 12th percentile, self rated their expertise to be on average in the 62nd percentile. I mean, that is not even close. That’s not even in the ballpark. These people are way overestimating how good they were at this topic. Ever seen anything like that? Ever seen anything like that on social media? Maybe you’ve been there. I’ve been there. You score a big winning trade, you do something, you’re like, “oh yeah, I’m good, I’m good.” But I mean, we’re only getting that to start. The researchers attributed the trend to a problem of metacognition. The ability to analyzes one’s own thoughts on performance. And I quote, those with limited knowledge in a domain, suffer a duel burden. Not only do they reach mistaken conclusions and make regrettable errors, but their incompetence robs them the ability to realize it.
Clay: And I’m going to spend some time here because I see it all the time. No more of this, “well Clay, you’re just saying that because you want me to buy your course. Clay, you’re just saying that because you’re a hater, you’re jealous of that person. Clay, you’re just saying that because you don’t like that person’s choice path of learning.” All right, what am I talking about, I hear it all the time. “Clay, why would I invest money on a training course?” And I don’t mean my training course, I just mean anything. “I’m just going to go out there and I’m going to learn, I’m going to learn from my mistakes. So I’m going to use this money, go out there so I can trade and then, yeah I mean I get it Clay, I’m going to lose money, everybody loses money, but I’m going to learn from it.”
Clay: What does this just tell us. The dunning kruger effect, because of this metacognition tells us that because those people have limited knowledge… This is why it’s so cruel, this is why trading is so hard. It’s not a single burden, it’s a duel burden. There’s two problems with it. And I see this one all the time, the first one. Not only do they reach mistaken conclusions, I see it all the time. “Hey Clay, I lost money, okay, but I learned from it.” “Oh, that’s great, what’d you learn from it?” And then the lesson they give me is totally, totally not the lesson they’ve learned from it. In fact, I won’t say in every case, but in many cases the lesson that they think they’ve learned is actually only going to compound and make things worse in the bigger picture.
Clay: And now I have a term, metacognition. They don’t have… because they don’t have experience, because they have limited knowledge. And what is limited knowledge. Well I know how to buy a stock, you need a thing called an online broker and you sign up and then there’s a buy button, I know the math. If a share price is 10 dollars and I have 100 dollars in my account that means I can buy 10 shares, see, I know how to trade, I know how the markets work. Limited knowledge.
Clay: So because of that they reach mistaken conclusions, and make regrettable errors. But there incompetence robs them of the ability to realize it. And that’s why, right? When I see it, and I guess I’m talking to myself for a little bit but Clay, when you see people saying they’ve made mistakes, that’s great they’ve admitted the mistakes. And then their whole thing is, but I’m going to learn from my mistakes. Yeah? What did you learn? Oh, i learned this. Well, mistaken conclusion. Metacognition, the dunning kruger effect. It’s no wonder why trading is so hard. It’s no wonder why… And I get it. I’m not shocked, I’m not even calling those people stupid. I realize that, why would I invest money on a course when I can use that money to trade on my own. I’ll lose money but I’ll learn from those mistakes.
Clay: That is leaving out a fatal fatal part. Well, that is assuming that you’re actually even going to be able to know what mistake there was. Well, I lost money, there’s a mistake and I can learn… Well why did I lose money? Well, I got a bad entry point. Are you sure? Because here’s the fact of the matter. You could do everything right. You could have an awesome strategy, you could have an awesome system. You could behave, you could do every single thing right and guess what, you could still lose money. Well Clay, how is that possible though, you said you did everything right? Because the markets are random. The markets don’t give guarantees. There’s no such thing as the perfect trading strategy.
Clay: So in and of itself… Now again, in many cases, yes, you took a loss on that trade because you did a whole bunch of things wrong. But there’s that gray area, or maybe you didn’t do anything wrong. Maybe the only reason you lost is because the markets are, at the end of the day, random. All we’re trying to do as traders is leverage odds in our favor. We’re trying to give ourselves as many edges as possible. But that doesn’t mean that you’re always going to win. You can take losses by doing everything right. You get in at a very logical spot. You have a stop in at a very logical spot and just for whatever reason sometimes things just don’t work out.
Clay: So that is… This is by no means me trying to persuade or push you into investing in my course, but if you just walk away with one thing from this whole episode, please realize this, if you take the loss on a trade, you may not have done anything wrong. Many people don’t get it. It sounds backwards. Well, of course I did something wrong, I lost money. No. Losing money is part of it. But how do you know if you did something wrong. How do you know whether or not you should have even been in the trade. Well, that’s where you have to get not limited knowledge, but full knowledge.
Clay: Because once you have full knowledge, then you have competence, right? You actually can look and understand what is going on. But you’re not going to get that when you’re just getting started and you don’t… It goes back to this saying, I’ve said it a million times. And again, one of those things where I’ve always said it, and always said it, but I didn’t realize I was actually just saying a science based thing but, when you don’t know, what you don’t know. Well how exactly are you going to learn from anything. How can you draw proper conclusions? You can’t.
Clay: So picking back up with the article, and I like they have a question and answer section too. What causes the dunning kruger effect? Confidence is so highly prized that many people would rather pretend to be smart or skilled then risk looking inadequate and losing face. Even smart people can be effected by the dunning kruger effect, because having intelligence isn’t the same as learning and developing a specific skill. Many individuals mistakenly believe that their experience and skills in one particular area are transferrable to another. See it all the time once again. And as I say this, this is not me saying what you should look for. What this hopefully is doing… Go back, what’s this all surrounded about. What’s this all surrounding around? Self awareness, right? And you trying to get self awareness. You trying to be aware.
Clay: And maybe as you’re driving or working out or just sitting there listening to this, hopefully you are trying to be as self aware as possible. And the key to being self aware is being honest with yourself. Just run a self-audit. Audit yourself. And just be honest. Which again, is going to be tough, why? Well, what did we just talk about? Confidence, right? We all want to be confident. We all have that little ego. Not the ego in the sense of you think you’re the greatest thing ever, but you just want to feel good about yourself. And you don’t want to risk, well maybe I don’t know as much as I think I do. And confidence is going to be a problem. And it’s a catch 22 because you almost feel like, well if I start admitting that yeah, maybe the dunning kruger effect is the problem.
Clay: And then all of the sudden you feel like your confidence is going down. But in all actuality your confidence should be going up. Why? Because you’re being self aware. You’re actually learning. You’re admitting some things to yourself that are ultimately going to help you. And things that are going to help you should be raising your confidence level. So please don’t fall into that pit. And then, again, maybe this is a trap. Are you sitting here saying, “listen, I’m a smart person, I’m intelligent.” And I’m raising my hand right now because I’m in this camp. I have an engineering degree. Engineers are the worst. We are the worst. We are so arrogant. We are so high on ourselves.
Clay: Well, I’m an engineer. Do you know how many calculus classes I had to go through? Do you know how many statics and dynamics and sciences of materials, and what were the others… I had to do some electric engineering classes. I had to do material of science classes. I had to do, oh my goodness, dynamics… Oh, wow, I am smart. I’m an engineer. Oh, trading? That’s all numbers. Okay, well, let’s just go and do that. Oh my goodness, engineers. Now I’m not saying engineers can’t figure it out. I’m just saying, maybe that’s what’s getting you. Are you maybe putting to much confidence, is your own perception of your intelligence maybe masking the fact of, well that’s what’s holding you back is you just think you’re a little to smart or you think that you’re as [inaudible 00:21:04] your skills as an engineer are transferrable to the markets. Now, yeah, knowing some numbers are nice, but there’s…
Clay: But here’s the thing, it’s not like you need calculus to be a good trader. You don’t even need algebra. You need a calculator and be able to add, subtract, divide, and multiply. That’s pretty much it. So maybe that’s something that’s holding you back. And then picking back up, why do people fail to recognize their own incompetence. Many people would describe themselves as above average in intelligence, humor, and a variety of skills. They can’t accurately judge their own competence because they lack metacognition or the ability to step back and examine oneself objectively, which we already talked about. In fact, those who are the least skilled are also the most likely to overestimate their abilities.
Clay: Which, I see it all the time. Here’s the fact of the matter, and this goes for everybody. I don’t care what kind of degree is hanging up on your wall, when you are getting started as a trader, you are the least skilled of many, many, many skilled people. Let’s not forget the fact that the financial markets are literally the most cut throat place in the world. They are a savage, savage place. People are trying to take your money. I am trying to take your money. I am trying to take other people’s money. You are trying to take my money. And I did a video on this years ago. It never got much traction but I called the markets the ultimate game. Because that’s what it is, a game of, I think that’s a good buy, yeah? Well, I think it’s time to sell.
Clay: Somebody’s going to be right, somebody’s going to be wrong. Oh, you’re going to buy there, well I’m going to do this there. Oh, you’re thinking of selling there, well I’m going to do this here. It is a cut throat game. So yes, when you are a beginner and just getting started, you are literally the least skilled person that could be there. But yet, the way the science works, those are the people that are most likely to overestimate their abilities. And again, you see it all the time. All it takes is one of these micro caps, or penny stocks, or not even necessarily that. It takes one or two good trades, where they totally get lucky, but all of a sudden… All right, I got this figured out, I’m really good.
Clay: Well, no, you’re least experienced but here you are overestimating your abilities, thinking you’re way better than you are. It makes sense, it’s science, that’s what the research data says. That’s what I see all the time, that’s what I’m sure you see all the time. You know that people are new and by definition, least skilled, yet they’re the ones that are running around, behaving in manners… Listen, I was in my early 20’s at one time too. Your testosterone is roaring, you think you’re awesome, you think that nothing can hold you down. Now all of a sudden you made some money by clicking buttons and somebody just says, “you know what, hey, maybe you don’t know as much as you think that you do.” Oh, you hater. Don’t be jealous of me you hater. Okay, whatever.
Clay: But here we go. Science, science, so what is the double curse of the dunning kruger effect. The double curse. Now I’ve already talked about this but I want to just really drive this stuff home because it matters, it matters a lot. The dunning kruger effect results in what is known as a double curse. Not only do people perform poorly, they’re not self aware enough to judge themselves accurately, and thus unlikely to learn and grow. And in trading terminology, and thus… Well, let me change it around, and thus likely to blow up their accounts. And thus likely to give back all their gains. And thus likely to give back a major part of their gains. Have you been there before? I’ve been there. There’s nothing to be shameful of. Where you’re making good trades, you’re on some sort of win streak. You feel like, wow, this is awesome.
Clay: And you keep doing what you were doing. But here’s the problem, when you don’t know what you don’t know, when you can’t objectively analyze your performance, you don’t know that really what you’re doing, and here’s the typical one, people chasing a stock, chasing, hold and hope, hold and hope, hey it went in my favor. Chasing, uh oh it went against me. Hold and hope, hold and hope, hey it ended up going in my favor. From that point of view the rational thing, the logical thing to do is to keep doing that. Why? Because as somebody that when you don’t know what you don’t know and when you’re behaving in a manner that’s actually making you money, why would you not do that?
Clay: I mean, do you see why trading is so difficult. Because, it literally is the rational thing to do to keep chasing, and then hold and hope. Because, I mean, the past two or three times you done it it resulted in money. So that’s a trading strategy, why would I not chase, why would I not if it doesn’t keep going up. Oh, I’ll just hold and hope because it will eventually go back up. Well, I mean if that’s what’s been producing you results the rational person is going to keep on doing it, as they should because well, it’s producing them results. But you just don’t know any better because you have this limited knowledge. You have the double curse working against you.
Clay: So now this next subsection. Who is impacted by the dunning kruger effect? The dunning kruger effect has been found in domains ranging from illogical reasoning to emotional intelligence, financial knowledge… You can’t make this stuff up. And firearm safety. And the effect isn’t spotted only among incompetent individuals, most people have weak points where the bias can take hold. It also applies to people with a seemingly solid knowledge bass. Individuals rated as high as the 80th percentile for a skill have been found to overestimate their ability to some degree. So in other words, yeah, we’re all at risk of it, but especially in those areas, one of them being financial knowledge. Which is definitely trading, right?
Clay: Financial money. And then you factor in the emotions and wow, things can spin out of control very very much so. This tendency may occur because gaining a small amount of knowledge in an area about which one was previously ignorant can make people feel as though they’re suddenly virtual experts. Only after continuing to explore a topic do they realize how extensive it is and how much they still have to master. Oh, nailed it, nailed it. I’ve been there. Isn’t it amazing, and I’m not just talking about trading how, you know nothing about something, right? Nothing about something, and then you learn something about it. And you’re like, oh, wow, yeah. Maybe in all actuality I’m doing it right now.
Clay: I probably am doing it right now. I’ve done a little bit of research on the dunning kruger effect, who knows. I’m probably thinking that I understand way more about it then I do. I’m probably explaining things not in their right precise way. I mean this is probably happening… The great irony of the dunning kruger effect. I’m aware of it, I’m trying my best to make this as accurate as possible, but this is also trying to ground it with a comparison to trading because I’ve seen all these things and, even if you’ve, this is the first episode, I would encourage you, there are hundreds, hundreds of episodes now, over the years I’ve done, and you’ll see this topic pop up over and over again in people’s journeys.
Clay: But again, I get it, I could be suffering from the dunning kruger effect because here I am thinking I’m some sort of… Well, I don’t think I’m an expert on it but, you get the idea right, you learn something and then you think you know way more about it then what you do. See it all the time in trading. And again, ask yourself, is this maybe what you’re doing? Are you sure you truly understand how much goes into trading? That’s why I started off saying, just because you lose money, doesn’t mean you did something wrong, doesn’t mean anything needs to change in your strategy. That’s how in depth trading is. Because that should be a mind blowing statement to you where you’re like, wait, huh, I can lose money but that doesn’t mean I did anything wrong?
Clay: Yeah, because, you could have a totally valid trade plan, you could have everything working out but just because the markets are random, it doesn’t work out. And what happens is, and going back to the, well, I’m going to use this money and I’ll learn from my mistakes as I go. And I can’t sit here and say that’s what guaranteed to happen, that would be misleading. But what is likely to happen, unless you have a money tree that grows out back, unless you have a fantastic sources of income that just keep the monies coming back in, keep the dollars replenishing, which was me. In college when I was learning I had, which I talked about many times before, the book business. So the book business was just churning out money. Here Clay, oh, that was stupid, here take some more money. Oh Clay, you moron, there you go take some more money.
Clay: So unless you have a really, really streamlined cash flow, or maybe you just inherited a whole ton of money, I suppose you could do this. But the problem is by the time people truly learn, truly learn, and I’m not trying to talk negatively about people because nobody’s perfect out there but I can say that there are lots of sources out there where… This shouldn’t be shocking but people make trading seem maybe a little easier than what it is. Hey, all you got to do is sign up for my alerts. Hey all you got to do is take this class and you’ll be ready to go in two months. Hey, all you… And they’re not necessarily telling you, they’re not necessarily implying that you better be ready for blood, sweat, tears, and a whole lot of frustration.
Clay: And I will say that even if you invest into my class… So if you invest into my training, you better be ready to work super super hard. You better be ready for some mental mental battles. And I’m talking about battles like viking style battles, all right? That’s the mentality that you need to have. But the problem is, by the time they actually learn how much goes into it, how much of a challenge it is, how many moving parts and components, which individually are easy, right? There’s nothing hard about buying a stock and doing the math. That individual component, no problem.
Clay: So all these individual components, none of them, I would say, are complicated at all. But there are several of them and you need to make sure that they’re all behaving and working in harmony. That’s where the challenge comes in to play. And by the time people learn that this is what is required, their accounts are basically gone. They’ve given up. Maybe they’ve never even got to that point cause they lost all their money before hands and then, well trading is just gambling it’s all total randomness there’s nothing you can do about it. All the markets are all rigged. Oh, it’s always the [inaudible 00:31:59] goes, it’s the market makers. Some people will probably just blame it on themselves but very rarely.
Clay: But that’s the problem is, you learn a little bit and then all the sudden you think you’re some sort of expert and you think you got it figured out but by the time you realize, oh wow, I’m not, then hopefully you still have some money left where you can tackle things again. Or hopefully you just are being totally honest with yourself right now while you listen to this and you say, maybe I do think I’m some sort of virtual expert just because I learned a few things. But, I mean, I don’t know, maybe you got it all figured out, maybe you don’t, welcome to the challenging world.
Clay: So now going on to this section, why do people think they know more than they do? One type of overconfidence called over precision occurs when someone is exaggeratedly certain that their answers are correct. These individuals may seem highly confident and persuasive due to their apparent confidence. They are only driven by desire for status and power and the need to appear smarter than people around them. Now the first part here as I would equate to trading is that they are exaggeratedly certain, so in other words they are very very certain.
Clay: And these people, they’re thinking they’re highly competent, right? And persuasive due to their apparent confidence. So here’s the thing here. What would be something that would create all of this stuff, confidence. What could persuade you, what might make you think that you’re highly competent. Well that’s simple, by making money, right? That’s why trading is so cruel because… And again, it goes back to, you’re actually rational. It would be illogical for you to sit there, do something, make money and be like, well I didn’t do that right. Right? For something that’s new and with limited knowledge, limited experience, that doesn’t make any sense. For them to be like, hey I just made money, I did something wrong. No they’ll be like, okay, okay I like this, all right.
Clay: And what is happening, they’re being persuaded, right? They’re being persuaded by the results of the trade. Now very rarely, and this why I commend people and this is why I want to offer you up encouragement and hope that it is possible. But there are people that are like, listen, I traded, Clay, I made some money but I don’t know how. I have no idea what I’m doing. I felt like that was total randomness. And it’s very rare to get a message or an email or something on social media that says that but it does exist. And I commend those people. And the first thing I say is, good for you and your self awareness. That’s fantastic.
Clay: And a lot of these people, and sometimes, I realize that I need to… I want to get education, what do you offer. In some cases, these people, they don’t go with my program and that’s fine. If they feel comfortable with somebody else’s that’s fine. I mean it’s so rare. And the reason it’s rare is because it’s difficult to do psychologically to actually make money and then not have confidence in it. Because, well why would you have a lack of confidence when what you do just made you money. But again, over precision. Very very typical, very very common. Why do people overestimate their confidence. Overestimation, another kind of overconfidence refers to the discrepancy between someone’s skills and the perception of those skills.
Clay: People who overestimate themselves frequently engage in wishful thinking with harmful consequences. If someone overestimates their capabilities they may take dangerous risks and overextend themselves beyond their limits. Like an athlete pushing themselves to the point of injury. Let me try this, like a trader pushing themselves to go big or go home. This one is just, I mean that is trading to a T. So much so, I mean, refers to the discrepancy between someone’s skills and the perception of those skills. I’m going to read it. Traders who overestimate themselves frequently engage in wishful thinking. What kind of wishful thinking do you see out there. I mean honestly.
Clay: Just pull up Instagram, Facebook. And what do you see you scroll. Oh look, there’s a dude on his laptop, standing in front of some sort of fancy car. Oh look, that guy, on an island. Oh look at that guy, fancy cars. Oh look at that guy, wow that person just posted… wow that person really just made 50,000 dollars in one day. Wow, that person really just made 100 thousand dollars this past month. That’s awesome. Well I want to do that. Again, that’s rational, that’s logical, right? Who wouldn’t want to make that? Who wouldn’t want to have that sort of success? There’s nothing wrong with that inherently, to want to be successful. I’m not saying that at all.
Clay: I’m just saying that with this part of incompetence, people overestimate themselves frequently. They’re engaging now in wishful thinking, wow I can do that. With harmful consequences and as traders you know what those harmful consequences are, you losing money. You in some cases losing a whole lot of money. If someone overestimates there capabilities they take dangerous risks. The most dangerous risks, the most common risks… they obviously don’t go into it thinking it’s a dangerous risk but it’s a risk I see all the time has to do with position size.
Clay: They make a couple trades, they see some success, again, everything here right now so far rational. And then all of a sudden they go, they up their position size. So I don’t know, maybe they’re doing 100 shares, then they go to 500 shares. Maybe it’s 500 shares then it’s 1,000 shares. For you, anybody that’s trading any form of contract. Maybe it’s two contracts then all of a sudden it’s five contracts. Something. And at the time they don’t realize that it’s dangerous. If they realized it was dangerous then they wouldn’t do it. Now if they do realize it’s dangerous and they do it anyways well then they’re not even trying. They’re just being a gambler, right? In fact at that point it’s a degenerate gambler where it’s like well, this is dangerous, eh, let it ride.
Clay: Okay, and that’s fine, if you want to be degenerate gambler that’s okay. But, as far as this article is concerned, yeah people just… wishful thinking. Overestimating of things and then all of a sudden you’re taking on risks that are going to potentially put yourself in harms way. Now of course it’s not like, in this example, the athlete pushing themselves to the point of injury but it’s the trader pushing themselves to the point of account destruction.
Clay: How to avoid the dunning kruger effect. So the next section here. To avoid falling prey to the dunning kruger effect people can honestly and routinely question their knowledge bass and the conclusions they draw, rather then blindly accepting them. Which is what I’ve been talking about, so I suppose I got a little ahead of myself but, the point here being, blindly accepting them. As logical as it may be, as rational as it may be to say, hey I did this that and the other thing, the result was I made money, therefore I did something smart. I did something right.
Clay: Again, I keep repeating this because I want you to realize I’m not calling anybody stupid. Like you’re not stupid to think that that thought process is like, well I can’t believe I thought like that. No I can believe. You should think like that. You’re a logical rational person, but that’s just blindly accepting the results. And as hard and as counterintuitive as it may be to just go through that logic of, I did this that and the other, it resulted in money, therefore I did something right. I’m going to keep doing that and then all of a sudden you make more money and then it just snowballs against you. But maybe, just please, throughout this, are you sure you’re just not blindly accepting results.
Clay: Are you sure that the money you made, is that actually viable, is that actually something that can be done longterm? And I don’t care that you saw somebody online, or anywhere that is saying, hey, here’s how I trade, hey, here are all my results. Because you know what, you’re not them, they’re not you. You both have different risk profiles. I’m not taking anything away from the other person. I’m not saying that’s fake. Now in many cases it very well could be fake but let’s just say that it’s not fake, let’s say that it’s real.
Clay: That’s great for them. But that doesn’t mean you should blindly accept what they’re showing you that will work for you. Why? Because again, it’s one of those nooks and crannies of the market that a lot of people are not going to tell you. Why? Because it’s so much easier from a sales perspective to say, hey, look at my results, hey, I can teach you how to trade like me, buy my course. That’s such an easy sales pitch. It’s much more difficult to say, hey, you can make money trading, hey let me teach you how to use the tools but yeah the tools you’re going to need to use to actually build a strategy that works for your risk tolerance.
Clay: Wait, you mean I can’t just copy your strategy, I can’t just learn your strategy and then everything’s fixed? No, you’re actually going to have to go through blood sweat and tears, it’s going to be painful. It’s going to be difficult because you have to actually take these tools, which I can teach you, I can teach you the tools. I can teach you how you should be using and manipulating the tools to get things in the place that you need it to be, but at the end of the day that fine tuning is something that only you can do. And the reason why only you can do it is you know your risk tolerance better than me.
Clay: And I’ve used this analogy ten times, more then ten times, tons of times. But if you want to learn how to have fun, some people might say, well I have fun, go skydiving. Other people are like wait, skydiving, no I want to read a book at home. Both are fine, nothing is wrong, nothing is right. They’re just two different people having fun in different ways. And if the person that likes the book, ultimately at first, because of their limited knowledge, goes and buys something from somebody and then that person tells them, hey this is how I have fun. You did this, you get in a plane and you jump out and you pull the par… It’s not going to work for that person. They’re going to be freaking out.
Clay: But again, dunning and kruger effect even for there. Well when you have limited knowledge and you don’t know that having fun is a big big component of your risk tolerance just like trading is, well you can put yourself in those situations. So just be honest with yourself. Hopefully you’re not blindly following the results you get. As David Dunning proposes, people can be their own devil’s advocates by challenging themselves to probe how they might possibly be wrong. Individuals could also escape the trap by seeking others who’s expertise can help cover their own blind spots. Such as turning to a colleague or friend for advice for constructive criticism. Continuing to study a specific subject will also bring one’s capacity into clear focus. The key thing there is constructive criticism.
Clay: I don’t care if you invest in one of my programs or not. Although that is exactly what it’s hinting at. Hey, get something from somebody that knows what they’re doing, that’s done a bunch of stupid stuff so they can help you see your own blind spots, because they’ve probably had their own blind spots themselves. But putting all that aside, ask for constructive criticism. Just because somebody criticizes you, and I’ll be the first to admit, maybe I’m not the best at always doing my criticism in the most polite of ways. But I grew up playing sports, I grew up in high school with football coaches. Their constructive criticism was yelling down your face. But they were just yelling because they wanted you to get better, they wanted to fix your blind spots, they wanted to fix your errors.
Clay: So I could probably be a little more soft around the edges, a little bit more plush when it comes to criticism, but again, be honest with yourself. If somebody were to tell you maybe your trading strategy is reckless and dangerous, maybe just maybe that person is not a hater. Maybe that person is not jealous. Maybe that person has just seen what you’re doing, or probably done what you’re doing and they know where it ultimately ends up. That’s all I’m asking is maybe just consider that. Learn to take constructive criticism. Don’t take all criticism as just flat out somebody being a hater, somebody being jealous.
Clay: I think the biggest results for me was, during the whole marijuana stock boom a couple years ago, ticker symbol acb, one off the top of my head. Cgc, tlry, cron, all these were booming and booming. And it was clear as day to me and other people that have experience. That have done stupid things, that have done moronic things. We realize the blind spots that can occur, and you try to tell these people, you realize that right now the only reason you’re making money on these marijuana stocks is because they’re basically going straight up. And you’re chasing, you’re buying and then uh-oh, it went against me, I’ll hold and hope. And then it explodes again, and you make money.
Clay: It’s not always going to be like this, hater. And I did a whole YouTube video on this. I should’ve probably dug it up and I could have read through the comment section. But, I mean, I got… Now to be fair, some people, they did a great job being self aware. I’m not saying I was the cause of them to have the light bulb go off. But there were people that said, oh, okay, I can see that, maybe I should consider that. Other people, wow. I was just a baby, I need to mind my own business, I need to fill in the blank of, Clay, don’t worry about it you’re just a hater, you’re just not as good as me. Okay, fine. Constructive criticism, please, you got to learn to take it. I’m not perfect at taking it. I think I’ve become much better over the years.
Clay: In fact, if I can offer you up any hope, if I can offer you up any motivation to take constructive criticism. It’s basically what has built Claytrader.com. It started off as a single class and then as painful as it was, the class was lacking. The class needed this that and the other so guess what, okay let’s add class number two. Ah Clay, that was great, but this that and the other. Oh okay. And constructive criticism, it can lead you far. It can lead you very far, just learn to take it. Not everybody is a hater and I fully admit, I fully realize, I do understand that in this day and age of the internet and twitter and everything. Some people are just haters, right? They’re trolls, they have their own problems at home and they’re taking them out online.
Clay: So in some cases, yeah, it could somebody being a hater. But not always. So you can’t attribute everything that everybody says that maybe goes against what you’re saying or doing as an automatic hater. So just keep that in mind. Again, all science, these are the psychologists that are recommending, well how do you beat this thing? Constructive criticism. And of course, yeah… Maybe invest in somebody’s program, watch a bunch of random YouTube videos. That’s a set of problems in and of itself. So this next question I like. Do I have the dunning kruger effect?
Clay: Ask yourself, have you ever heard similar criticisms from different people in your life and ignored or discounted them. You may have experienced the dunning kruger effect. Take a look at those areas in your life where you feel 100 percent confident, acknowledge the possibility that you might not always be right and you might need to acquire knowledge or practice more. And to me, when I read that, I just see more problems when it comes to trading because I can see somebody saying, well yeah Clay, that’s what I’m doing right now, I’m acquiring knowledge by trading, and by trading and by going out there and watching YouTube videos I’m getting that knowledge, I’m practicing.
Clay: But when you don’t know what you don’t know, that’s just not good enough. What do I mean? Well, let’s just say, well first off… Internet, library, free information everywhere, there’s no doubt about it. Everywhere. And there’s good information out there, for free. I’m not discounting that either. But you got to also acknowledge the fact that there’s a lot of terrible information out there. There’s a lot of false… Now not false in the sense of just flat our wrong, not false in the sense… Well, some of it… Not malicious, but there’s a lot of stuff out there. What is being implied, what is being persuaded to you. The impression that’s trying to be put on you is not exactly the reality of the matter.
Clay: And from a business, from a marketing, from a sales psychology perspective, fantastic, you’re doing a great job. I’ve studied plenty of sales psychology. But from a trading psychology standpoint, it’s very very dangerous. But let’s just say, with all that out of the way, let’s just say that somehow in your journey to acquire knowledge you found all the good bits of information. Somehow, I don’t know how, but somehow you were able to pluck out everything that’s good. And do to the dunning kruger effect, and when you don’t know you don’t know, I’m not sure how you would ever do that but let’s just say you lucked out and you got all the good bits of information. That’s still not good enough. Why? Because you still need to be sure that you’re learning about all that good information in the right structure.
Clay: Let’s say you wanted to learn how to do math, and somehow you got all the right information about maths out there. But when you don’t know what you don’t know, dunning kruger effect here, you go and you learn about algebra first, and then you learn about subtraction, and then you go to trigonometry, and then you go to division, and then you go to calculus, and then you go to addition, and then you go to differential equations. I mean you’re going to be a mess. It’s all good information, but if you’re not learning it in the right order in the right structure, it’s still going to create all kinds of problems for you. And this is just the learning phase. This isn’t dealing with all the emotions and voices that show up in your head when you’re actually trying to trade.
Clay: And people wonder why trading is so difficult. Because you have all these things. Your brain, it gets way too overwhelmed. It is possible but this is the whole idea behind these episodes. I want you to be aware of what is going around out there. How do you fix the dunning kruger effect? Question what you know and pay attention to those who have different view points. Seek feedback from people you can trust who you know are highly skilled in your area of interest. Be open to constructive criticism and resist the impulse to become defensive. Don’t pretend to know something you don’t. Make it a priority to continue learning and growing. And yeah that stuff is cliché but that is what you have to do. That is absolutely what you have to do.
Clay: And I do get it, I’m waving the hand here. Well, Clay, how do I find an expert out there? How do I know who’s actually trading? How do I know? And I get it. I really do understand that it can be difficult because there are so many games and foolery out there where you don’t know who to even trust, who to seek advice from. And that’s myself included. If you’re a brand new person to me, or if you’re brand new to me, don’t just assume that because I did this that all of a sudden I got it all figured out or that I’m some sort of nice guy. I don’t want you to assume that because yeah it is a challenging world out there. It could be a situation where, you need to tread lightly.
Clay: And what I always tell people is listen, as far as my training is concerned, this sounds like a sales pitch but it’s not, my point here is that I offer a 30 day money back guarantee on my program. So if you get in there and you’re like, I don’t feel like I’m learning anything at all, well then you got the 30 day window. On top of that, just listen to the podcast, right? The podcast, you can watch my YouTube channel and at some point, and don’t have to trust me, I don’t want you to trust me right now if you’re very very new to me. But I will say that the podcast, and there’s many testimonials and stuff like that out there. But I do realize that, and I wish I had the perfect answer to how do you know who’s being legit, how do you know who’s being real.
Clay: The best I can do is just shoot straight with you like I try to do here. Even if you invest in my classes you better be ready for blood, sweat and tears. It’s not a holy grail. it’s not a, hey, trade like me, hey I make a bunch of money so therefore I’ll teach you how to trade like me and you’ll make a bunch of money. Because I get it, easy sales pitch. But that’s just not the reality of trading. If you sign up for my classes then you are still going to need to learn how to build and you’re going to have fine tuning that you need to do. But that is the dunning kruger effect. That is all the science that goes behind it but. But absolutely crazy how that all played out and how… I mean it’s fool’s gold. It is straight up the science of fool’s gold and fool’s gold is very real.
Clay: It’s scientifically proven. And like I said, I probably am doing it a little bit right now as I talk about the dunning kruger effect. I probably have some fool’s gold in my full understanding of it. But I am very confident. Been around coaching and mentoring since 2013. I’ve seen a lot. I do pride myself in replying to all YouTube comments which I do do. But also, I do that because it lets me know what’s out there. It lets me know the thought process and I can say reading the thousands upon thousands of YouTube comments and replying to them… And again, if you don’t believe me that’s fine. Pull up any YouTube video of mine, go through the comment section and you’ll see I reply.
Clay: Again, am I always soft and plushy in my constructive criticism, people? Absolutely not. I’m trying to work on that, that is a work in progress but my point here is I do have a good pulse on what I see out there all the time. What I see out there consistently. And the dunning kruger effect I assure you I see all the time. It’s out there everywhere. But once again, I don’t want you to take my word for it, just go out there and start to look around. And I promise, the more and more you’re going to learn about trading and the more and more just how difficult it actually is. You’re going to be looking people and saying, oh, I remember behaving like that, I remember that thought process, I remember jumping to those conclusions.
Clay: And you’ll just really see it really is all over the place. So hopefully you’ve found this helpful, hopefully I could at least open your eyes, hopefully your being self aware, you’re being honest with yourself. You’re trying to realize, I don’t know, am I blindly accepting things and hopefully you just decide to give me more of a try, as somebody that can offer you up some blind spots. That can offer you up some, hey, you might want to consider that. Whoa, be careful doing that. And just like I said, I’m not asking you right now to go and purchase my training or anything like that even though it comes with a 30 day, I’m not asking you to do that. All I’m asking you is just check out the channel.
Clay: Check out other podcast episodes I’ve done. Listen to other people’s stories. And if you listen to enough of them, you’re going to see a very common themes, and really, we haven’t had any new experiences, I don’t know, probably for the past 150 episodes just because there’s only so many experiences people can really have. I mean you always have some unique little twists. But really, it’s pretty boilerplate in terms of trader’s journeys that people repeated over and over again. And a lot of this has to do with, obviously now with me learning more with the dunning kruger effect. So like I said, hopefully this helps. Be aware of it, be honest with yourself, and yeah, get out there and learn how to take some constructive criticism.
Clay: Learn how to maybe not just blindly accept the results you have gotten or that you’re getting or that maybe you will get. Just be a little extra negative with yourself. And realize that by being negative, you know what, you’re actually building confidence because you’re giving yourself a more realistic viewpoint of things. Wow, almost an hour on this one, bud. Super important, hopefully you found it as helpful as I did.
Announcer: This has been the Stock Trading Reality Podcast. Thanks for taking the time to hang out. To learn more about Clay and the Clay Trader community, including the trading team, premium training, and more, visit claytrader.com.

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