Donald Rumsfeld was the United States Secretary of Defense from 2001 to 2006 under President Bush. He is known for many things, but will always be remembered for his statement of an old truism, as quoted -

… as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.

In any field of human endeavor, there is a range of knowledge and competence that runs from the absolute beginner to the acknowledged expert. When starting, everyone is new, with a compliment of “known knowns” that is, generally, empty. For example, when I decided I wanted to learn about investing, my “known knowns” consisted of knowing what money was and that something called “stock” existed.

Given time, I started to develop a set of “known unknowns.” What was stock, really? How did one acquire it? How did one choose which to buy, and then how much? The questions started accumulating and my to-do list for learning grew at an alarming pace. As I learned more, I started shifting items from the second category (the “known unknowns”) into the first category (the “known knowns, “ or my knowledgebase). My second category grew at a slower pace as I learned more, but it still grew. Eventually, my first category was larger than my second, and I felt that I had a decent grounding in the field of investing.

I was wrong.

The Dunning–Kruger Effect

There is a fascinating study from 1999 by David Dunning and Justin Kruger of the Department of Psychology at Cornell University. In a nutshell, the Dunning-Kruger effect happens when someone thinks their competence in a skill or knowledge set is high simply because they don’t have the knowledge to know just how much they don’t know. As a result, incompetent (or simply poorly-skilled) individuals tend to overestimate their skill level, whereas skilled individuals are aware of their limitations.

These limitations are Mr. Rumsfeld’s “unknown unknowns.”

At the point where I thought I was starting to really get my brain around investing, I had a set of unknown unknowns that was much larger than I could have ever imagined, all of them hidden to me. I thought I was doing pretty well until one day someone asked me if I traded options. I had no idea what options were. One, huge, “unknown unknown” just made a thunderous noise as it revealed itself and immediately made the move into the second set. I now had a huge “known-unknown” and months of learning ahead of me.

Was I a victim of the Dunning-Kruger effect? Likely so. If someone had asked me if I knew about investing, I probably would have replied yes and been proud of the knowledge I had acquired, having no idea just how much I didn’t know.

The Taxonomy of Breadth

First Category

Known Knowns

Your depth of knowledge. Everything you know that makes up your primary skill set.

Second Category

Known Unknowns

Your breadth of knowledge. Everything that you know exists and some basic information about those things, but nothing more.

Third Category

Unknown Unknowns

Your ignorance.

Based on this realization, I’ve come to classify people and behaviors based on which set is their primary focus (whether they realize it or not).

Those who typically live in the third category, often without realizing it, have a huge compliment of unknown unknowns. I should be clear, these are people who have this huge compliment and don't realize it. They may think that their focus is on the first category, but the third is actually the focus. These people are living the Dunning-Kruger effect. They believe they know the sum and total of a subject and often find that things simply don’t work out the way they expect they should. These people are surprised when events don’t unfold in the most obvious way. They often find that their plans are foiled not by others but by simple chance. “I had no idea that could happen!” is a common phrase heard from such people.

Those who typically focus on the first category are the second-tier experts in any field. They have a large set of knowledge and can usually accomplish any reasonable task that requires that skill set, but they’re rarely innovators. They may realize that the third category exists, but they don’t put much thought towards that fact. They have their skill set and they’re comfortable with it. They will learn new things only as needs arise. These people make excellent engineers as you can give them a task and they can immediately apply their skill and knowledge to complete the task. You can rely on these people to almost always demonstrate competence, but not always insight.

The true experts, however, are the people who typically focus on the second category. They have, by necessity, a huge first set of “known knowns” as a result of consistently replenishing their second category from the third. This person is the senior architect who can not only bang-out the engineering task from her skills, but also knows the “lay of the land” from her breadth of knowledge. She may not know how to use all of the technologies available to solve a particular problem, but in having the breadth of all technologies in her "known unknowns," she knows what’s available. She can evaluate a problem against possible solutions, even those in which she isn’t currently conversant, and select the best or most likely one. Then, if need be, she can put in the time to move that skill from the second category to the first. If the decision doesn’t work, she has the breadth to realize this fact and make a course correction from other available options.

People who focus on the second category are constantly trying to find items in their "unknown unknowns" and get them into their "known unknowns" as quickly as possible. And in doing so, they acknowledge that their third category will never be empty, and they will never never presume it is. They avoid the Dunning-Kruger effect by simply realizing it exists. These are the people you see reading industry trade magazines and web sites, picking up an introductory book on the latest technology just to get a quick grounding, and always asking, “What’s new? What are you working on? What’s cool that I’ve not heard of yet?” You meet these people at industry conferences.

And when they mention that they’d heard of the cool technology years ago, you mutter under your breath that they’re a hipster and just showing off. But that’s a different article entirely.