Explaining Financial Basics – Dunning Kruger Effect
- Ed Patton
- Oct 20
- 3 min read
Updated: Nov 3
Leaders of many small to mid-sized businesses (SMB) are not provided with clear and concise financial basics.
This is not healthy.
Leaders need to know if their time and money are well spent — and have the clarity to evaluate results and to decide what’s next.
Their accounting or financial professionals should ensure business fundamentals are clearly understood.
Accounting and financial professionals often underestimate how the Dunning–Kruger effect contributes to confusion when conveying financial fundamentals to SMB leaders.
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In summary, the Dunning–Kruger effect (DKe) is:
Overconfidence fueled by an unawareness of limitations.
In layman's terms..."you don't know what you don't know".
Professionals know how to generate accurate, compliant and timely financial reports.
Some conflate these skills with the ability to clearly communicate financial fundamentals (FF) to SMB leaders.
They equate accuracy and compliance with comprehension — or clarity.
Generating reports and clearly communicating their meaning—without technical terms or jargon—are two very different skills.
The four stages of the DKe are listed below. The descriptions in parentheses correspond to the following image.
1. Unconscious limitations (The Peak of Mt. Stupid):
At this initial stage, individuals are unaware of their lack of knowledge or skill. This leads to them overestimating their abilities.
2. Conscious limitations (Valley of Despair):
Individuals become aware of their limitations and the gaps in their knowledge. This is a crucial step where they recognize the need to learn and develop new skills.
3. Conscious competence (Slope of Enlightenment):
In this stage, a person has gained the necessary skills but must still apply them with conscious effort and focus. It requires concentration and deliberate practice to perform the task correctly.
4. Unconscious competence (Plateau of Sustainability):
The highest level of mastery. The skills and knowledge are so internalized that the person can perform the task automatically and without conscious thought, making it look effortless.
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The Trender® Platform provides SMB leaders with their business’s clear and concise full financial profile via its 5 Elements® of Financial Fundamentals.
The Trenders are uniquely qualified to convey clear and concise FF because it has:
Defined FF
Calculated FF (with existing, common business financial information)
Summarized FF (each of the 5 Elements are condensed to a single dollar amount)
Reported FF (multiple SMBs have been provided with clear and concise FF over many years)
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Rhetorical Question
Rhetorical question for management of SMBs…"Do you feel there is a void when it comes to being provided complete and comprehensible financial fundamentals?"
It is my experience that the answer to this rhetorical question is almost always – “Yes”.
Warning – businesses increase their odds of experiencing an undesirable outcome(s) when they do not comprehend and track their complete financial situation.
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Why It Matters
Financial fundamentals are essential at every stage of every business...this is because they are "fundamental".
Leaders need and deserve reporting that shows whether their capital and time are well spent – and provides insights that enhance confident evaluations and effective decisions.
If it is not clear and concise, it is of limited value to business leaders.
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Reach out for an introductory phone or video call to discuss how succinct and understandable financial fundamentals have helped the leaders of many privately owned businesses.
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Edward B. Patton
5701 Broadway, Suite 102
San Antonio, Texas 78209
Phone (210) 822-9977
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