The Dunning-Kruger Effect and Theranos: A Cautionary Tale of Overconfidence

In 2003, Elizabeth Holmes founded Theranos, a promising biotech startup claiming to revolutionize blood testing with just a few drops of blood. By 2014, the company was valued at $9 billion. But beneath the surface, the truth was much darker. The technology was flawed, and the company’s downfall began (📉).

How did Elizabeth Holmes and her team miss the warning signs? Let’s explore a fascinating thinking tool called the “Dunning-Kruger Effect” and see how it played a crucial role in the Theranos debacle.

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

Dunning and Kruger’s research involved a series of experiments in which participants were asked to assess their abilities in different tasks such as logical reasoning, grammar, and humour. The results consistently showed that those who performed poorly in these tasks tended to overestimate their abilities, while high performers were more accurate or even modest in their self-assessments.

The Dunning-Kruger Effect is not a simple case of ignorance; it is a complex cognitive bias that arises from the interplay between self-perception and objective performance. It highlights the importance of metacognition – our ability to think about our own thinking – and demonstrates how our self-awareness can be skewed by our level of expertise in a given area.

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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)

In this stage, the person doesn’t realize they lack the necessary skills.

When I started my blog in 2020, I believed writing was easy and anyone could do it. I was unaware of the intricacies of crafting engaging content. I began by writing list-based articles like “Best Indian Food Places in NYC” thinking they would propel me to the top. And indeed, one article did. I started thinking, “Wow, this is easy!”.

I believe at one point, I even participated in rivalry-based schadenfreude, putting down competing writers. But there was a big catch. I was oblivious to my incompetence, standing at the peak of Mt. Stupid.

😰 Conscious Incompetence (The Valley of Despair)

At this point, the person becomes aware of their lack of knowledge and skills.

In my blogging journey, I soon realized that merely writing list-based travel articles would get me nowhere. The success of one article was pure luck. None of the other articles was being read. I didn’t know my niche, my audience, my interests, or what I wanted to achieve through my blog.

I was also naïve to assume storytelling was easy. Now in the Valley of Despair, I was conscious of my incompetence and acutely aware that my writing was subpar, questioning my future in this space.

🧐 Conscious Competence (The Slope of Enlightenment): 

The individual acquires the skill but needs to concentrate on it actively.

In the Valley of Despair, I acknowledged that I still loved writing because it helped me think and learn better. I realized my goal was to explain complex decision-making topics using simple stories from history and philosophy. The only path forward was to keep writing.

I started following my favourite writers on Twitter, analyzing the writing styles of the books I read, and researching online how to form better sentences. Most importantly, I continued publishing. I was climbing the Slope of Enlightenment.

🧘🏽‍♂️ Unconscious Competence (The Plateau of Sustainability): 

At this stage, the person has mastered the skill, and it becomes second nature.

Now, I wouldn’t claim to have mastered writing and publishing content online. But I have embraced the idea of consistent learning and accepted that I will never know everything about this subject. Nevertheless, I am much more comfortable publishing my thoughts and writing on the blog. My articles have improved, and I understand that I will continue to grow sustainably.

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”.

While it is tempting to attribute the Theranos story solely to the Dunning-Kruger Effect, it is also essential to consider the wider context and other factors such as fraud and deception at play. It will be unfair to pin the downfall of Theranos only on Elizabeth Holmes’ overconfidence, as the entire organization, its board, and investors all played a role in the company’s collapse. However, ultimately, the Theranos saga also serves as a cautionary tale for the dangers of overconfidence and the importance of recognizing and overcoming the Dunning-Kruger Effect.

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:

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  If 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