Episode #77 – Using The Dunning-Kruger Effect To Save Time, Money, and Heartbreak In Your Real Estate Investing Business

You're listening to the “REI Marketing Nerds” podcast, the leading resource for real estate investors who want to dominate their market online. Dan Barrett is the founder of AdWords Nerds, a high-tech digital agency focusing exclusively on helping real estate investors like you get more leads and deals online, outsmart your competition, and live a freer, more awesome life. And, now, your host, Dan Barrett.

Dan: Hello everybody. This is Daniel Barrett from AdWordsNerds.com. How are you? I hope you're having an amazing week.
Real quick, before we jump into the show this week, I am getting together with a group of investors to help them to get a consistent flow of ugly and discounted houses every month from online ads. [01:02.4]

If you would like to join us, if you've closed deals before—this is the catch—and you can invest $50 a day into ads to get deals every single month, what I want you to do is text the word “deals” to (737) 701-5969. My partner, Justin, is going to get back to you personally with details within 24 hours.

One last time, if you want to get deals every single month from online ads, I want you to text “deals” to (737) 701-5969, and you can expect a personal reply with all the details within 24 hours. Very much looking forward to that.

So let's get in to this week's topic, not doing an interview this week. I just want to talk with you. I want to rap with you because, honestly, this is something that has been bothering me, and I want to put this message out there because I think it's important and I think this is a message that it's very probable that you specifically need to hear. And if you don't need to hear this now, you are going to need to hear this in the near future. [02:22.8]

I want to talk about the Dunning–Kruger effect. I'll explain what this is in a second, if you've never heard of this, but the reason I want to talk about this and the reason it applies to real estate investing specifically is that right now we are in a place where the real estate investing industry has experienced several years in a row of really significant growth.

If you look at the amount of deals being done by investors, the amount of marketing dollars being put out by investors and the amount of new investors entering the marketplace, being generated by programs like FortuneBuilders and all the investor coaching programs and all the investing educational programs and everything out there, we are in a literal boom time for real estate investing. [03:15.9]

We've talked about on the show how there are worries about what the housing market is going to do and how marketing prices are going to affect competition and iBuyers. We've talked about all that stuff on this show, but that stuff is things that people are worried about happening in the future, having a bad effect in the future. It hasn't really hit us now. In fact, now, if you look at how the industry is doing in general, we are crushing it. This is a wonderful time to be a real estate investor by nearly every metric you could possibly look at. That's great. I want everybody to make as much money as possible. I want new investors in the marketplace. I want this good fortune to spread. [04:02.7]

But the market is a complex system. You’ve probably heard me talk about complex systems. I love systems thinking. This is a big part of who I am and how I approach what I do, and how I help my clients and my students. But the market is a complex system, and one of the things you need to realize is that everything in a complex system has second-order effects—meaning, you have the effect that you have, the primary effect, the thing that happens right away, but that triggers a domino sort of effect, where this is going to happen because that happened and then something else is going to happen.

Let me give you an example. We're in this real boom time for investors. There are more investors than ever. Investors are making more money. That's all awesome. The second-order effect of that is that the world of people that serve investors is also experiencing a giant boom time. Now, this may be something you are completely unaware of. If you're a real estate investor, you are busy doing deals; you're busy trying to get leads; you're busy building your business; and you might be building your team. You’ve got enough going on. You're not really thinking about the service providers or companies that market to investors. [05:12.5]

That's totally cool. That's my world. That's the world that my business lives in. And in my world, my industry of companies that service investors, there have never been more of those companies ever. There are more people entering the marketplace every single day.

There's more and more competition. Now, for me, personally, I actually think that's great because competition helps everybody. It has helped me raise my game. For a long time, we were the only people really doing online marketing for investors. Now there's competition, and I actually learn a ton from my competition. Really, it doesn't scare me to have other people in the market because I know I'm not perfect. I'm never going to know everything. I also know that I've focused my entire company, entire business process around constant improvement and learning, so if somebody comes out and does something better than me, that doesn't threaten me because I learn what they're doing and I incorporate it into what I'm doing. [06:08.6]

That's all well and good. But the flip side of that, the flip side to having more competition, just like the flip side to having more investors in the marketplace, is that there's always a percentage of those people that are terrible at what they do. Just like when there are new investors entering the market, and this may be something you've experienced because I hear this all the time when I talk to investors, and they say, Look, I've been investing in this market for years and I kind of know how it works, and, all of a sudden, there are all these new investors coming in and I go to these deals and I go to the house to meet with the sellers, and I can see the offer that my new competitor's making and it's so high, I know they can't make money on it.

And you're in this situation where you can see someone doing it poorly, because maybe this person's new or they don't have the experience or whatever the reason is, and it's frustrating for you because you're like, Look, I have to make an offer I can make money on. I can't make an offer where I lose money, right? It's frustrating to lose the deal to someone that you know is making a mistake, even if you know in the long run that person's probably not going to last. In the short term, it hurts you. [07:18.6]

There’s a very similar kind of dynamic emerging in the world of people that are serving real investors where there a lot of really great new companies coming out and really interesting approaches that have me very excited. There are also people coming out serving the real estate investment market who flat out have no idea what they're doing, just straight up a hundred percent ignorance.

And this is not a situation where it's like, Oh, they're doing it new and I don't like the new way. I actually love the new way. That's how I make my money, by constantly evolving and adapting. This is just people doing things that hurt investors, hurt their clients and hurt the industry. [08:01.1]

The reason I brought up in the beginning of this podcast the Dunning-Kruger effect is that I was really thinking about, look, it's so hard to tell as an investor who you're talking to. Are you talking to somebody that knows what they're doing? Are you talking to somebody that's a complete moron?

I liken this to when I go to the mechanic. I just don't know anything about cars, man. I really don't. If I go to a mechanic and the mechanic is like, Yeah, your tubular flange is plugged into your “transcombobulator,” to me it all sounds the same as somebody who's saying, Hey, your transmission is grinding or whatever. I actually don't even know if a transmission grinds. I don't know what I'm talking about. But you know what I mean. It's impossible for me to tell gobbledygook from just technical jargon, and so, it's very hard for me to tell a good mechanic from a bad mechanic, other than just that I’ve got to work with this mechanic and I'm going to judge them based on what happens.

So, I was really trying to think through, Is there a way of telling who knows what they're talking about and who doesn't? Because, a lot of times, you could be talking about something new and it can sound really weird, but it could work great. Likewise, someone could come in and say something you've never heard before, and they're just basically making it up or just this complete B.S. based on a sample size of one. [09:22.8]

So, how do you tell? One of the most accurate ways I’ve found to tell the difference between a service provider who actually knows what they're talking about and a service provider who doesn't, is applying this idea of the Dunning-Kruger effect.

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So, the Dunning-Kruger effect, it's a demonstrable psychological thing happens in the lab all the time and it's based on our, everybody's tendency to overrate how much we know. We all tend to think we're better than average. [10:27.4]

If you ask a group of people—and I think they did this experiment on a senior class in high school—and you say, How would you rate yourself as a driver? Below average, average or above average? I think about 80 percent of the people that they survey rate themselves as an above-average driver. Guess what? You can't all be above average, right? You're not. Just, statistically, you're not above average. And we all do this. This is not a thing that I'm saying like, Kids do this or what other people do this. We all do this and it’s just a human tendency. We all tend to think that we're smarter than average, better looking than average, better drivers and average, etc. And it's fine. [11:10.9]

But how this relates to picking a service provider is that the more that you know about any kind of realm—so, let’s say, the more you know about real estate investing, the more you know about the type of properties that you invest in, the more you know about your market—the less certain you are in your language when you describe that thing.

I’ll put it this way. Take any complex subject. Let's talk about the economy. You're at family dinner. Let's say, it's Thanksgiving dinner. You’re out there with your family, your whole extended family, and you've got your cousin who kind of is a know-it-all and he's out there saying, Oh, absolutely, the Fed is going to raise interest rates a hundred percent. I mean, if you look at the bond market, give me a break, man, they're absolutely going to raise interest rates this quarter. He is a hundred percent certain, right? [12:06.2]

Chances are that he doesn't really know that much about what he's talking about. How can you tell? The more you know, the more you know about how complex everything is. There's nothing as complex as the economy. There's a million and one different things to think about. Our ability to predict what it's going to do is practically zero. It's very hard to understand. There are people that spend their entire lives doing nothing but trying to understand the economy and they have no idea what's going to happen. So, what is the likelihood that your cousin who's a hundred percent certain that he gets it is going to be right? It’s probably low.

Now, if you have a different conversation about the economy and you ask this person, Hey, I'm worried about interest rates. Do you think they're going to be up or down? The person that really knows what they're talking about is probably going to say something like, Yeah, it's a really complicated question. It's hard to say. [13:05.1]

Now, why is that? Why is that person more likely to actually know what they're talking about? Because if they know a lot about the subject matter, they know how complicated it is; they know how complex it is; they know how many factors are involved. And because of that, they know that it's hard to be certain. This is the Dunning-Kruger effect, in a nutshell. The less you know about a subject, the more certain you are that you understand it; and the more you know about a subject, the less certain you are that you have any idea what's going on.

That’s tax. Let's apply this directly to your life as a real estate investor right now. You are going to get approached as a real estate investor by a lot of people who want to have you pay them money to do something for you. This is only going to get more extreme before it dies off. [14:00.0]

We've been in this market for a long time at this point. We've served real estate investors and only real estate investors for a long time. We've seen a lot of people come and go. There's just more people out there now than ever before, so you're just going to get approached by a lot of people and a lot of people are going to make a lot of claims. Here is the dividing line, for me, personally, and I get approached all the time. As an agency, I get people that hit me up basically every day, asking me if I want them to do this service, that service or whatever.

Here's the dividing line that I use and you can use this for your real estate investing business. The more sure they are that they have “the” answer, they have found “the” way, anytime someone says, I've “mastered” this, anytime someone says, I am “the best” in the world at this, anytime someone says, I am the God of this or I am the Lord of that, or no one does this better than me, that is the reddest of red flags for me. [15:06.9]

Because when we get on the phone with an investor and they say, How much money do I need to spend in order to dominate my market in Google Ads? I say, It depends, depends on the time of day, depends on the time of week, depends on the time of year, depends on the season, depends on the market, depends on the housing market, depends on your competition. It depends on a lot of stuff, right? It's complicated. The more you know about it, the more complicated it gets, and the more complicated it gets, the more humble you get.

This is one of the reasons that it's hard to serve people because people want the easy answer. They want the shortcut. They want the easy money. There are a lot of people who are willing to go out there, stand on the soapbox and scream for all the world to hear that they have “the” shortcut, “the” answer, “the” easy money. “I've figured it out. I'm the best.” There are a lot of people that are willing to go out there and stand on that soapbox, and scream that out for the world to hear. [16:17.0]

But the problem is the people that are really out there doing the work and the people that are really out there mastering their craft, they aren't on the soapbox. They're out there working. And when you talk to those people, they're not shouting for the world to hear. What they're doing is they're saying, It depends.

The next time you see someone out there making claims, the next time someone approaches you, the next time someone says, Hey, I would love for you to pay me to do this, just remember the Dunning-Kruger effect. Remember that the more certain someone is that they have “the” answer, the less they probably know about what they do.

Hey, I hope that episode was useful for you.

Just a quick reminder. I am getting together with a group of investors to help them build a consistent flow of ugly and discounted houses every month from online ads. If you would like to join us, if you've closed deals before and you can invest $50 a day into ads to get deals every month, what I want you to do is text the word “deals” to (737) 701-5969. My partner, Justin, is going to get back to you personally with details within 24 hours.

Again, you can text the word “deals” to (737) 701-5969. You can expect a personal reply with all the details within 24 hours.

Guys, this is Daniel Barrett signing off. Hope you have an awesome rest of your week, and I will talk to you very soon. Cheers. [18:00.0]

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