While a large circle of competence might indicate intelligence, knowing exactly where the boundary of the circle is exemplifies wisdom. As such, knowing the location of the boundary of the circle trumps the size of the circle. That doesn’t mean we cannot grow our circle. But we should stay within our circle of competence to improve our chances of making good decisions.
The circle of competence is a mental model that emphasizes the importance of sticking to what we know when making decisions. It identifies the specific knowledge bases each of us have built through life experiences and study. Often, these knowledge bases vary greatly from one person to another. For example, an electrical engineer has a specialty of knowledge about the flow of electricity and the functionality of electrical equipment while an intellectual property attorney is knowledgeable about intangible assets and government patent protection. But there are plenty of areas in life where our circles overlap with others’. Oftentimes, these overlaps include common things like the usage of a certain language or driving a car.
Regardless of what our specific circle of competence encompasses, it is wise to make decisions on issues that are within our circle and pass on what lies outside the boundaries. To do otherwise can lead to misery and ruin.
I’m no genius. I’m smart in spots, and I stay around those spots.
Thomas Watson, Sr., Founder of IBM
Warren Buffett and Charlie Munger
Few individuals come to mind as champions for the circle of competence model like Warren Buffett and Charlie Munger. For example, Buffett laid out the concept for investors in his 1996 Letter to Shareholders.
Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You may only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.
Likewise, Charlie Munger spelled out the importance of knowing your aptitudes and sticking to them, captured in Poor Charlie’s Almanack.
Every person is going to have a circle of competence. And it’s going to be very hard to enlarge that circle. If I had to make my living as a musician…. I can’t even think of a level low enough to describe where I would be sorted out to if music were the measuring standard of the civilization.
So you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you’re going to make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.
Warren Buffett and Charlie Munger practice the circle of competence methodology by categorizing issues into three baskets: in, out, and too tough. If the issue is inside their circle, then they can choose whether to pursue it (in) or not (out). And if it is outside of their circles of competence, it goes in the too tough basket and they move on. They don’t have to have an answer for everything.
Knowing Where the Boundaries Are
As Buffett noted in his 1996 Letter to Shareholders, knowing the boundary of our circle of competence is vital. If we don’t know where the boundary is, how can we expect to stay within it?
Charlie Munger told a fable during the 2007 Commencement to the USC Law School about the physicist Max Planck and his chauffeur. Planck was touring Germany giving lectures about quantum mechanics after winning the Nobel Prize, and towards the end of his tour, Planck’s chauffeur, having heard Planck’s speech many times by now, suggested that he and Planck switch places. They did, and at the conclusion of the chauffeur’s recitation of the lecture, a physicist stood up and posed a very difficult question. The chauffeur replied, “I’m surprised that a citizen of an advanced city like Munich is asking so elementary a question, so I’m going to ask my chauffeur to respond.” While humorous, the chauffeur couldn’t even attempt to answer the question because he was far outside his circle of competence.
The problem with overstepping our boundaries is oftentimes a result of our ego. The desire to sound intelligent in front of others seduces us into saying that we know more about a topic than we actually do. Indeed, saying we know about a particular subject sounds better than to admit we don’t know. However, in doing so, many of us have had the even more uncomfortable experience of getting caught in the act of deception. It’s best to stick to what we know and admit ignorance where we have it.
If knowledge is power, knowing what we don’t know is wisdom.
Adam Grant, Think Again: The Power of Knowing What You Don’t Know
Everyone has areas of ignorance and, while uncomfortable, it is best to acknowledge them. Despite the discomfort, sharing areas of ignorance helps us build connections; it’s an important step to building trust. Not only are we being vulnerable, but we are also elevating the other person into a position of knowledge where they can be the one to teach us something.
Sometimes we get tricked into thinking we are still within our circle of competence when we have actually ventured outside. This can happen when the boundary is not well defined; instead, it blurs from high definition to low. If the blurring is gradual enough, it is difficult for us to differentiate inside from outside our circle.
The most important thing in terms of your circle of competence is not how large the area of it is, but how well you’ve defined the perimeter. If you know where your edges are, you are way better off than somebody who has a circle five times as large but is very fuzzy about the border.
Warren Buffett
Other times we get confused through comparison. Consider how we can feel brilliant in one company and stupid in another. Our circle of competence hasn’t changed; our yardstick of comparison has. We are creatures of comparison, and as such, we are constantly relating one thing to another. When we say something is cold, it is an indirect comparison to something else. In the case of the weather, it is cold in comparison to average or recent temperatures, but that fluctuates. So too does our feeling of intellect depending on with whom we interact.
Regardless of the reasons that cause us to lose sight of the boundaries of our circle of competence, we should know where they are. It is vitally important that we do.
If you have competence, you know the edge. It wouldn’t be a competence if you didn’t know where the boundaries lie. [Asking whether you’ve passed the boundary is] a question that almost answers itself.
Charlie Munger, Poor Charlie’s Almanack
Growing the Circle
Although knowing where the boundary of our circle of competence lies is more important than the size of the circle, we shouldn’t be content with our circle remaining static. Warren Buffett has a quote that, at first glance, might seem to contradict this notion. He says, “If we can’t find things within our circle of competence, we won’t expand the circle. We’ll wait.” This quote is not suggesting we shouldn’t keep learning. On the contrary, Warren Buffett is continuously learning and expanding his circle of competence. Charlie Munger dubbed him a “learning machine”. By his statement, Buffett means he won’t fool himself into stretching the boundary of his circle of competence to make a decision. His decision is to be patient and keep learning on the sidelines instead.
There are many benefits to having a large circle as opposed to a small one. For one, the larger the circle of competence, the more likely it is to overlap with the circle of another’s. When this happens, conversation and connection are much easier with those around us. Another benefit is that much more of the world is accessible. We can delve into topics with some variety.
But just because we should aim to grow our circle of competence doesn’t mean that doing so is an easy endeavor. Many argue that to become an expert at something, we have to spend around 10,000 hours of intense watching, learning, doing, and refining. Developing a fundamental understanding requires extensive time and effort.
I don’t know anyone who [learned to be a great investor] with great rapidity. Warren has gotten to be one hell of a lot better investor over the period I’ve known him, as have I. So the game is to keep learning. You gotta like the learning process.
[. . .]
If you’re going to be an investor, you’re going to make some investments where you don’t have all the experience you need. But if you keep trying to get a little better over time, you’ll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work, and practice. It’s like playing golf – you have to work on it.
If you don’t keep learning, other people will pass you by.
Charlie Munger, Poor Charlie’s Almanack
Learning need not be a solitary activity. Indeed, very few people are autodidacts. Instead, most of us benefit from the communal learning process we’ve experienced throughout our formative years. Learning is better when shared with others.
Collaborative learning should continue after exiting formal education for the workforce. One of the best ways to quickly and robustly grow our circle of competence is with the help of a skilled teacher. This teacher can take many forms, including a boss. It is wise to put great emphasis on who our mentor will be when selecting a job.
Having a teacher is important for experienced professionals too. This form of a teacher can be a peer, a consultant, a coach, or a collective group of people with similarly high levels of expertise. Those who are the highest performers are frequently the ones who are constantly working with others to get better. Take professional golfers, for instance. They are the best in the world at the game, yet they still rely on the feedback and tips from swing coaches. The same goes for most other professional athletes and performers for that matter.
Performance in other professions is no different. Effective business professionals seek feedback to strengthen and grow their circle of competence. Surgeon Dr. Atul Gawande had been operating for many years when he decided to get a coach. He wrote an article in the New Yorker about how he had plateaued and needed help. Subjecting himself to feedback identifying everything he was doing wrong was surely uncomfortable. But Dr. Gawande forged ahead with his coach because the discomfort was a catalyst for improvement. If a skilled senior surgeon like Dr. Gawande needed a coach, and professional performers of all types require coaches, why should we be any different?
I absolutely believe that people, unless coached, never reach their maximum capabilities.
Robert Nadelli, American executive for The Home Depot, Chrysler, and other companies.
Operating Outside the Circle
Life isn’t perfect and sometimes that means we are in situations where we do not have the expertise needed to make decisions. Take leading a country, for example. The President of the United States of America has to make difficult decisions with potentially enormous global repercussions on a daily basis. These span topics such as military operations, diplomatic relations, government budgets, legislation, political frameworks, negotiation, leading others, and so on. It is rare for a single person to be well versed in all these areas so it is necessary to involve others. That’s why the President has many advisors who are experts on their particular subject. By relying on the circle of competence of each advisor, the President is able to form better decisions than he or she would be otherwise able to.
Running a business is similar. It requires knowledge in technical matters, sales, management, leadership, and business. Business owners hire for two main reasons. First, to add different circles of competence to the team. Second, so the business can keep up with the amount of work required to operate. The first reason is why it is so critical to know where our circle’s perimeter is; if we don’t, how can we hire effectively?
Getting outside of our circle is fine as long as we do so knowing that we are out of our element. When we are outside our circle of competence, we would do well to refrain from making decisions that have any potentially significant consequences. Instead, we should merely be an observer and, like Warren Buffett and Charlie Munger, abdicate making a decision on anything in which we don’t have an edge. But in the instances where this isn’t viable, we must rely on those whose circles of competence envelope the areas we lack.
The Effects of the Circle of Competence on Our Latticework
Mental models are useful on their own and the circle of competence concept is no different. But it is also part of a larger latticework and, as such, it is impacted by and impacts other parts of our mental machine.
Dunning-Kruger Effect
A curious effect of expanding our knowledge is this: as the area of our circle of competence grows, so too does our perimeter of ignorance. The implications of this are numerous. First, it requires more effort to track the location of the boundary to make sure you stay within it. It’s like a possession: the more you own, the more maintenance is required.
Second, it often breeds humility. Those with small circles of competence have small perimeters of ignorance. They do not know what they do not know. This is sometimes referred to as “Mount Stupid” on a Dunning-Kruger chart of competence versus confidence. But as we grow our knowledge base, our perimeter of ignorance expands and we become aware of just how much more is out there. Moreover, we fathom the potential for even more information that we still might not know. The difference here is that we realize the likelihood of our ignorance’s existence.
The Dunning-Kruger effect and the circle of competence concept are inextricably intertwined.
The more I learn, the more I realize how much I don’t know.
Albert Einstein
Familiarity Bias
Familiarity bias is the comfort we feel with what we know. Here is where the circle of competence concept can make us fall into that bias: when we cling to what we know, we can be tricked into thinking the familiar is correct. There’s a fine line between sticking to our expertise and relying on it for all the answers.
Growing our circle of competence is a tactic to mitigate the effects of familiarity bias. Striking a balance between making important decisions within our circle of competence and intentional exploration outside our circle is necessary to limit bad decisions while also growing our knowledge base. This is often easier said than done.
Second-Order Thinking
Second-order thinking is the process of identifying the knock-on effects of a decision. The first-order effect of a decision is usually obvious. It’s the second- and third-order effects that are much more difficult to identify.
When we are operating well within our circle of competence, the second- and third-order effects are much easier to identify. That is because we have a strong understanding of the realm in which we are navigating. We have seen many different iterations of how decisions and events have played out, and we have internalized them into our framework for understanding how our world works.
When we venture outside our circle of competence, we develop a form of myopia where we can no longer see the potential knock-on effects. That is why it is so important to refrain from significant decisions that lie outside our circle.
Conclusion
In game theory terms, maintaining (and growing) our circle of competence is an infinite game. Much like losing weight, there is no end date. Even if we set a date to lose a certain amount of weight, we still have to exercise and eat well after that date to keep our weight at healthy levels, regardless of if we hit our goal or not. The same is true for learning and maintaining knowledge.
This is especially consequential with testing. We learn (memorize) information for a test. After we have taken the test, we must keep reviewing and using that knowledge in order to maintain it. That’s what is so hard about knowledge: the effort is perpetual.
Because the effort of accumulating knowledge is perpetual, our competence likely fluctuates. What we knew well at one point in our lives might be blurred when revisited many years later. The size of our circle of competence is not fixed in time. Knowing this means that defining and redefining the perimeter is a constant chore, but a necessary one.
Alas, our circles of competence are finite in area; we cannot be an expert at everything. Therefore, we benefit greatly from sticking to our circle of competence. Any meandering outside of it should be intentional and done with caution. And if we must venture into the unknown beyond our boundaries of expertise, we should strive to seek the advice of trustworthy team members who possess the needed circles of competence.
Real knowledge is to know the extent of one’s ignorance.
Confucius
