Curse of Knowledge

Curse of Knowledge
The curse of knowledge is a cognitive bias according to which better-informed people find it extremely difficult to think about problems from the perspective of lesser-informed people.
The term was coined by Robin Hogarth.

Just because we are good at something does not mean that we can explain that to others in an easier and understandable way.
Basically it is a lack of ability to explain what you know very well to others to understand easily.
It stems from your assumption that others already know what you know.

Curse of Knowledge examples
1. We would have heard several statements thrown at us by our senior management folks at our workplace during meetings like ‘stakeholder satisfaction’, ‘innovation DNA’ etc., which may not be translated effectively by the lower level employees
2. Analysts in media throwing information and data at will – we won’t be able to correlate with current situation
3. Annual report of companies are mostly not clearly articulated with information and data for a common man to understand – an exception could be Berkshire Hathaway letters to shareholders
4. Someone who can cook a food item very well may not be able to explain properly to others
5. The doctor may be very skilled, but could not be in a position to explain in layman terms to patients.
6. Our knowledge about a financial product may lead us to jump into decision making before proper analysis

Overcoming Curse of Knowledge
1. First understand your audience and accordingly plan your speech or presentation
2. Simply, follow the practice to explain everything to everyone in layman terms
3. Break complex things into smaller components and explain each of them in a simple manner and correlate all of them later to give a big picture
4. Cautiously unlearn and relearn what you already know – from a different perspective.
5. Make thorough analysis before making decisions – even if the area is much familiar to you.

My experience with Curse of Knowledge
Many a times I have had problems explaining about personal finance concepts to my friends and relatives, especially when they are absolutely not aware of it. If they had some prior knowledge, I was comfortable explaining to them with examples.
During 2006-07 bull market, I invested in some BFSI stocks with my existing knowledge on analysing and valuing stocks/businesses. Then, I realised that I had overlooked the Price-To-Book value ratio because I was unconsciously assuming that I knew what parameters to look for in investing BFSI stocks.
I learnt that it is more of PBV ratio that matters than PE ratio when investing in Banking and Financial companies.


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Filed under Behavioural Finance

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