The Dunning-Kruger Effect

Commercial Finance & Dunning-Krúger

A couple of times recently I have come across clients listening to what I considered as bad advice. Typically this has been promises of being able to do things which were never going to happen and applications to lots of lenders who all said ‘no’. In each case the client decided to proceed with another commercial finance broker rather than use my services, because they had been promised something much better than I could offer.

This is where I started to discover the Dunning-Kruger effect.

In truth I had come across this several times before, the indication was the client stating something along the lines of ‘I don’t agree Dave, my friend told me that he knew someone that got a loan at 1% interest and he could do the same for me’. I always referred to this as the ‘bloke down pub’ syndrome, where professional advice was ignored because someone down the pub knew better.

With commercial finance I have seen some real problems with clients succumbing to the Dunning-Kruger effect.

My Experience

Ironically it is experience that drives confidence, or so the theory goes. Let me tell you a little about a client that decided to go with some less experienced advice, because the deal was so much better with that broker.

The client had a number of issues. The variables we had were such that they would always limit the choice of lender we had who would actually finance their business (they were a landlord). The options I gave the client were based on my experience and knowledge of how commercial lenders work. I gave the client the best options for them based on what was achievable and realistic, I will not promise the earth when it is never going to happen.

The client looked at my suggestions then went with a different broker because they could do so much better. About 6 months passed when I got a call to ask if I could put in place the finance we originally talked about. I was really pleased the client had remembered me and had picked up the phone. The problem was that the client’s credit report showed a series of searches from other lenders, the trading had not improved (without the finance it was never going to) and as such the option we did have was now less viable.

In the end we did get the finance in place but it cost the client more than it would have done.

Am I Right To Be Realistic?

What this did was get me to question whether my approach with clients was correct. I had seen that being honest and giving genuinely helpful advice had cost me business.

That moment of questioning passed quickly, realising that being a professional was part and parcel of losing business. Where my experience says something cannot be done, or can only be financed in a particular way then I will say so. It is part of the confidence I have in dealing with business lending.

What I will change is that I will start to use the Dunning-Kruger curve when I explain my rationale to my clients, hopefully I can use this to get across a level of professionalism and get the client to buy in to doing things that are achievable.

By Dave Farmer

If you have any questions about this post then please get in touch or add your comments above.


7 thoughts on “The Dunning-Kruger Effect

  • So true Dave. And it can be so frustrating. I have the same issue as do a number of my clients who, like you, believe that honesty is the best policy and that you have to advise correctly. Important (in my book) to keep your moral and ethical integrity and stick to your prices though it risks losing a client. It can work. A client of mine called me last week with a dilemma of having been told that someone could do the deal a much better % point and he wanted to drop his price too. I managed to persuade him it wasn’t the way forward. So we worked out a slightly different pricing mechanism plus an offer (that had value to his client, but cost him very little) and off he went. He got the gig! Sometimes standing firm gives you better credibility too than someone who is willing to cut their price to get the business.

    • Thanks Karen. This article has generated a few comments and agreement! Appreciate your comments and did think of you when writing the article as I knew you would understand! The challenge for me is sometimes it is harder picking a case up after someone else has had a poor go at it, the options that were available are sometimes gone by that stage. Will stick to my guns.

      • There’s a useful case study in there for you – the client who thought cheaper was better, realised that all that glitters is not gold and as a result had their options reduced. And goes to prove my current favourite quote from Red Adair – If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur’. Ends up in a double whammy of badness for that client.

  • Great blog post, Dave. This is something we also sometimes see with new, less experienced clients. Most people know someone who can build a website on an amateur basis (it’s usually the son of one of the company directors) and I can understand why some businesses think this is a viable option. But quality services come at a price, and it’s always false economy to ignore this.
    Not everything expensive is good, but everything good is expensive.

    • Thanks Ben. I think it is something we have all come across. As Karen said, Red Adair’s quote of “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur” is oh so true…

  • We come across this all the time in our business. Other companies over promise on results and by the time the client gets there capital allowances claims report it is too late. They have committed to pay based on the results which are invariably lower than originally estimated. However we have obtained business where the client perceives we are being realistic based on our technical knowledge and experience rather than trying to use a sales patter. in my experience honesty is always the best policy.

    • Agree John. It still gets to you sometimes and invariably it is the client who suffers. Perception of value is always an interesting one to try and understand.

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