Differentiating Between Confidence and What You Actually Know

Screen Shot 2015-05-20 at 9.43.11 PM“Investor Know Thyself” is an ironclad maxim that is so simple but elusively deceptive. While integrally important in investing, it is even more so in life. Wisdom springs from knowing yourself. I was recently perusing the musings of Inner Scorecard (I’d highly recommend you go check out his stuff) and he wrote about confidence. What was really intriguing was the test he linked to. It was a simple true and false test but with a twist: every question you would ascribe a confidence level to your answers. The results were fascinating. And it has real implications in your life. It will give you a glimpse about how your brain is wired and if your confidence matches up with your actual knowledge.


 

Here is where you can take the test and here are my results:

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I find it interesting that my mean confidence was lower than the actual percentage of correct answers (67.76% vs 73.47%). I don’t find this surprising because I have a tendency to underestimate what I know. It is an area I need to work on in life.

I also find the glaring difference between questions answered correctly under medium confidence (a horrendous 42.86% correct) versus questions answered correctly under high confidence (92.86%) interesting. It’s fascinating that I answered a better clip with low confidence than with medium confidence. I don’t really understand it. Perhaps it has something to do with there being more random picks in the low confidence questions and I happened to luck out on the correct side on a 50/50 probability.

This all reminds me of the story Charlie Munger and Warren Buffett love recounting about Ted Williams, the baseball legend. Ted Williams describes in his book Story of My Life on how he became such a great hitter:

My argument is, to be a good hitter, you’ve got to get a good ball to hit. It’s the first rule in the book. If I have to bite at stuff that is out of my happy zone, I’m not a .344 hitter. I might only be a .250 hitter.”

In The Science of Hitting, Ted Williams explains how he divided the strike zone into 77 cells, each representing the size of a baseball. He would insist on swinging only at the balls in his “best cells”, even at the risk of striking out, because reaching for the “worst” spots would seriously reduce his chance of success.

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You must be knowledgable, but you must also know your limits. It’s why Buffett and Munger go on and on about “circles of competence” all the time. You have to wait for the fat pitches, the no brainers, and swing hard when the opportunity presents itself. Both in life and in investing.

But intelligence alone isn’t enough, like the case of GT Advanced Technologies and the funny spiral graph I wrote about demonstrates.

Take the test. Let me know what your scores were in the comments below. I’d love to know. I’m fascinated.

2 thoughts on “Differentiating Between Confidence and What You Actually Know

  1. Thanks for the shoutout! You were able to actually get a C on the test – a lot better than my D, although you thought you would get only a D as well!

    1. I’m still puzzled by the sub-50% accuracy when I rated my confidence between 70-80%. If I have one takeaway from this is that I need to swing for the ball only when I am 90-100% correct.

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