The Dunning-Kruger Effect

I’m a believer in understanding cognitive biases when investing. By paying attention to them, I have both enhanced returns and avoided major losses. Today I am focusing on the Dunning-Kruger effect. The DK effect is a type of cognitive bias in which people believe that they are smarter and more capable than they really are. It is why attending the Decarbonization in Shipping Forum was so vital this past week. One needed to sift through the valuable insights regarding decarbonization that will make money as well as those that clearly are driven by the DK impact.

One panelist talked about public shareholders as opposed to using the more traditional term, stakeholders. I’m typically a shareholder of the business, i.e. an owner. Government bureaucrats are stakeholders, meaning they impose mandates without any costs to themselves. This panelist also talked about his Chairman banning plastic cups in his company cafeteria, when their company’s business model relies very heavily on using environmentally unfriendly jet transportation. More importantly, some of the participants discussed actions that will drive massive destruction of capital. The path forward for new propulsion systems is unclear. Yet some firms are committing to $100.0 mil to $200.0 mil ship new buildings with uncertain propulsion technologies. They are engaging in bets that have lower odds than the roulette tables in Monte Carlo. By the time the folly of their decisions will manifest itself, many of them will have retired or moved on, with losses to be borne by others, mainly by their equity holders.

One of my goals in this blog is to share how to make money and not to virtue signal. Global warming is definitely a problem that needs to be addressed, but I am wary of solutions that are worse than the disease. I don’t own bitcoin because it is the trifecta of evil: bitcoin serves no societal purpose; it is carbon intensive and is mined at least 50% with coal generated electricity; and bitcoin drains capital from the system, so it is equivalent to a Central Bank tightening. That is at heart a personal decision. There were excellent points made at the Decarbonization in Shipping Forum, such as the need for mandated speed limits for ships, which could dramatically reduce emissions today. Clearly, the costs of regulation and compliance will favor the large ship owners, which will likely drive consolidation. European and US bureaucrats prefer large, inefficient companies to nimble entrepreneurs. I’m positioned for the consolidation of shipping. I am also alert at all times to the DK effect on decision-making. You may want to be, too.