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The story of Theranos is more than just a case of fraud and deception—it’s a textbook example of the Dunning-Kruger Effect in action.
Elizabeth Holmes’ overconfidence, combined with a lack of expertise, created a dangerous cocktail of misplaced ambition and misjudgment. But Holmes wasn’t alone. Her board, investors, and an entire ecosystem of enablers played their part.
The Discovery of the Dunning-Kruger Effect
In 1999, psychologists David Dunning and Justin Kruger published research where they found that people with limited knowledge or skills in a particular area tend to overestimate their abilities, while experts often underestimate their competence1If you want to read the research paper – Kruger, J., & Dunning, D. (1999). Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments. Journal of Personality and Social Psychology, 77(6), 1121–1134. https://doi.org/10.1037/0022-3514.77.6.1121.
🧠 To put it simply, the Dunning-Kruger Effect means that people who know very little about something often think they know more than they do, while experts are more aware of what they don’t know.
The problem is that the people with the most ridiculous ideas are always the people who are most certain of them.
Bill Maher
It’s not just ignorance; it’s about metacognition, our ability to evaluate our own thinking, which can be distorted by how much (or how little) we know.
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The Four Stages of the Dunning-Kruger Effect
There are four main stages of the Dunning-Kruger Effect, and amusingly, I experienced all four stages when I began my journey of publishing content online.
Unconscious Incompetence – The Peak of Mount Stupid: You think you know it all, but you’re blind to how much you don’t know. It’s the “I’m an instant expert” phase.
Conscious Incompetence – The Valley of Despair: Reality strikes. You now see how much you don’t know, and it’s humbling.
Conscious Competence – The Slope of Enlightenment: You’re getting the hang of it, but every step requires effort.
Unconscious Competence – The Plateau of Sustainability: The skill becomes second nature.
Here’s how I moved through the stages. At first, I thought blogging was just writing listicles like “Best Indian Places” and instant success would follow. Then reality hit—I questioned my skills, niche, and audience. Stuck in a humbling valley, I turned to storytelling, studied great writers, and kept publishing. Progress felt slow, but I learned how to write. Now, writing feels second nature, and I’m always learning.
The Dunning-Kruger Effect in the Theranos Story
The fascinating and cautionary tale of Theranos and its founder, Elizabeth Holmes, provides an excellent example of the Dunning-Kruger Effect in action. The company promised to revolutionize healthcare with its innovative blood-testing technology, but it ended up collapsing in a storm of scandal and controversy.
The Rise of Theranos
In 2003, 19-year-old Elizabeth Holmes founded Theranos with a vision to revolutionize the medical testing industry. She claimed to have developed a device called “Edison” that could perform a wide range of tests using only a few drops of blood from a finger prick. The idea was to make blood tests more accessible, affordable, and less invasive for patients.
Holmes managed to attract a star-studded board of directors, including former U.S. Secretaries of State George Shultz and Henry Kissinger and raised millions in funding. At its peak, Theranos was valued at $9 billion, and Holmes was celebrated as the youngest self-made female billionaire.
Red Flags and Deception
However, beneath the surface, there were numerous red flags. Employees and whistleblowers later revealed that the Edison device didn’t work as promised. Most tests were performed using commercially available machines, and the results were often inaccurate. Holmes and her team went to great lengths to conceal these issues from investors, regulators, and even their own employees.
The way Theranos is operating is like trying to build a bus while you’re driving the bus. Someone is going to get killed.
John Carreyrou, Bad Blood: Secrets and Lies in a Silicon Valley Startup
As the cracks in Theranos’ facade began to show, the Wall Street Journal published a damning exposé in 2015, which eventually led to the company’s downfall. In 2018, Holmes and former Theranos president Ramesh “Sunny” Balwani were charged with multiple counts of fraud.
Dunning-Kruger Effect at Play
The Theranos story is a prime example of the Dunning-Kruger Effect in action. Elizabeth Holmes, despite her lack of experience and expertise in the medical testing industry, believed she could disrupt and revolutionize it. Her overconfidence and inability to recognize her own limitations led her to make poor decisions, resulting in the catastrophic collapse of her company.
During the early stages of the Dunning-Kruger Effect, Holmes may have been in the “Peak of Mount Stupid,” where her confidence was high, but her competence was low. As her company grew, she may have entered the “Valley of Despair,” where she started to realize the limitations of her technology but chose to hide the truth instead of addressing the issues. She never climbed the “Slope of Enlightenment”.
The Theranos saga isn’t just about the Dunning-Kruger Effect—it’s a mix of overconfidence, deception, and systemic failure involving its leadership, board, and investors. Still, it serves as a stark warning about the dangers of unchecked overconfidence.
Overcoming the Dunning-Kruger Effect
🧠 Think critically and be within your Circle of Competence: Learn to evaluate information objectively using mental models and consider multiple viewpoints. Grasping the importance of your Circle of Competence is key to sidestepping the Dunning-Kruger effect. It encourages you to critically evaluate your skills, helping you avoid overconfidence. This awareness leads to more accurate self-assessment and better decision-making, ensuring you operate within areas where your expertise truly shines.
🧐 Seek feedback: Actively request constructive criticism from colleagues, friends, and mentors to gain an accurate understanding of your strengths and weaknesses. This helps you maintain a realistic perception of your abilities.
📚 Embrace continuous learning: Acknowledge that knowledge is never complete. Pursue lifelong learning and be open to new ideas and perspectives. This mindset allows you to stay informed and grow in your chosen field.
🔍 Question your assumptions: Challenge your beliefs and assumptions regularly. Utilize thinking tools like “cargo cult thinking” and “Chesterton’s Fence” to analyze the foundations of your ideas and examine the potential consequences of your actions.
🧘🏽♂️ Practice self-reflection: Consistently assess your skills, knowledge, and experiences. Use methods such as “stoic decision-making” to develop greater self-awareness and improve your ability to make better decisions.
😇 Cultivate intellectual humility: Recognize the limits of your knowledge and be open to the possibility that you might be wrong. This encourages curiosity and fosters a willingness to learn from others.
By employing these strategies and tools, you can better navigate the complexities of the Dunning-Kruger Effect, ultimately leading to improved self-awareness, better decision-making, and a more accurate understanding of your own abilities.
We have two classes of forecasters: Those who don’t know—and those who don’t know they don’t know.
Kenneth Galbraith
Beware of Dunning-Kruger Effect
In conclusion, understanding the Dunning-Kruger Effect and its four stages can help us avoid the pitfalls of overconfidence and poor decision-making. Always strive for growth, self-awareness, and self-improvement.
The only true wisdom is in knowing you know nothing.
Socrates
By embracing this mindset, we can learn from the mistakes of others, like Theranos, and make better choices that lead to a brighter future.
Footnotes:
- 1If you want to read the research paper – Kruger, J., & Dunning, D. (1999). Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments. Journal of Personality and Social Psychology, 77(6), 1121–1134. https://doi.org/10.1037/0022-3514.77.6.1121
