Circle of Competence

Circle of Competence

When ego and not competence drives what we undertake, we have blind spots. If you know what you understand, you know where you have an edge over others. When you are honest about where your knowledge is lacking you know where you are vulnerable and where you can improve. Understanding your circle of competence improves decision-making and outcomes. Popularized by Warren Buffett and Charlie Munger in investing, the model also prompts useful questions about career and business decisions: what do you understand, and what are you only assuming?

The model raises four questions:

1. What is a circle of competence?
2. How do you know when you have one?
3. How do you build and maintain one?
4. How do you operate outside of one?

What is a circle of competence?

Imagine an old man who’s spent his entire life up in a small town. He’s the Lifer. No detail of the goings-on in the town has escaped his notice over the years. He knows the lineage, behavior, attitudes, jobs, income, and social status of every person in town. Bit by bit, he built that knowledge up over a long period of observation and participation in town affairs.

The Lifer knows where the bodies are buried and who buried them. He knows who owes money to whom, who gets along with whom, and who the town depends on to keep spinning. He knows about that time the mayor cheated on his taxes. He knows about that time the town flooded, how many inches high the water was, and exactly who helped whom and who didn’t.

Now imagine a Stranger enters the town, in from the Big City. Within a few days, the Stranger decides that he knows all there is to know about the town. He’s met the mayor, the sheriff, the bartender, and the shopkeeper, and he can get around fairly easily. It’s a small town and he hasn’t come across anything surprising.

In the Stranger’s mind, he’s convinced he pretty much knows everything a Lifer would know. He has sized up the town in no time, with his keen eye. He makes assumptions based on what he has learned so far, and figures he knows enough to get his business done. This, however, is a false sense of confidence that likely causes him to take more risks than he realizes. Without intimately knowing the history of the town, how can he be sure that he has picked the right land for development, or negotiated the best price?

After all, what kind of knowledge does he really have, compared to the Lifer?

The difference between the detailed web of knowledge in the Lifer’s head and the surface knowledge in the Stranger’s head is the difference between being inside a circle of competence and being outside the perimeter. True knowledge of a complex territory cannot be faked. The Lifer could stump the Stranger in no time, but not the other way around. In this example, the Lifer’s accumulated local knowledge gives him an advantage over the Stranger. Familiarity does not make him infallible, especially when conditions change. Having this deep knowledge gives him flexibility in responding to challenges, because he will likely have more than one solution to every problem. And this depth increases his efficiency—he can eliminate bad choices quickly because he has all the pieces of the puzzle.

What happens when you take the Lifer/Stranger idea seriously and try to delineate carefully the domains in which you’re one or the other? There is no fixed checklist. Experience, mistakes you have examined, and performance against a relevant standard provide better evidence than confidence alone.

«We shall be unable to turn natural advantage to account unless we make use of local guides.» Sun Tzu

For most of us, climbing to the summit of Mount Everest is outside our circles of competence. Not only do we have no real idea how to do it, but—even more scary—should we attempt it, we don’t even know what we don’t know. If we studied hard, maybe we’d figure out the basics. We’d learn about the training, the gear, the process, the time of year, all the things an outsider could quickly know. But at what point would you be satisfied that you knew enough to get up there, and back, with your life intact? And how confident would you be in this assessment?

The book describes approximately 200 bodies remaining on Everest, in addition to those removed—a historical estimate rather than a current count. All of those people thought they could get up and down alive. The climate preserves their corpses, almost as a warning. The ascent to the summit takes you by the bodies of people who once shared your dreams.

In recounting Everest expeditions from 1922 onward, the book emphasizes the specialized knowledge and work of Sherpa climbers and guides. Indigenous to the region, Sherpas grew up in the shadows of the mountain, uniquely placed to develop the circle of competence necessary to get to the top.

Tenzing Norgay reached the summit with Edmund Hillary on the first successful ascent. The book reports that Sherpas made a quarter of subsequent ascents in its historical account, with some climbing as many as 16 times. Risk varies with experience, conditions, and repeated exposure; many visitors attempt the climb only once. For the Sherpas, working and climbing various parts of the mountain is their day job. Would you try to climb Everest without their help?

The physical challenges alone of reaching the summit are staggering. It is a region that humans aren’t suited for. There isn’t enough oxygen in the air and the top is regularly pummeled by winds of more than 150 miles an hour—stronger than a Category 5 hurricane. You don’t get to the top on a whim, and you don’t survive with only luck. Norgay worked for years as a trekking porter, and was part of a team that tried to ascend Everest in 1935. He finally succeeded in reaching the summit in 1953, after 20 years of climbing and trekking in the region. He developed his expertise through lots of lucky failures. After Everest, Norgay opened a mountaineering school to train other locals as guides, and a trekking company to take others climbing in the Himalayas.

Norgay is around the closest someone could come to being a Lifer when it comes to the competence required to climb Mount Everest.

How do you know when you have a circle of competence?

Within a circle of competence, we can recognize important gaps in our knowledge. We are able to make decisions quickly and relatively accurately. We possess detailed knowledge of additional information we might need to make a decision with full understanding, or even what information is unobtainable. We are better equipped to judge what further information is available and where uncertainty remains.

We can anticipate and respond to objections because we’ve heard them before and already put in the work of gaining the knowledge to counter them. We also have a lot of options when we confront problems in our circles. Our deep fluency in subjects we are dealing with means we can draw on different information resources and understand what can be adjusted and what is invariant.

A circle of competence cannot be built quickly. We don’t become Lifers overnight. It isn’t the result of taking a few courses or working at something for a few months—being a Lifer requires more than skimming the surface. In Alexander Pope’s poem “An Essay on Criticism,” he writes:

“A little learning is a dangerous thing; Drink deep, or taste not the Pierian spring: There shallow draughts intoxicate the brain, And drinking largely sobers us again.”

There is no shortcut to understanding. Building a circle of competence takes years of experience, of making mistakes, and of actively seeking out better methods of practice and thought. The key insight of this model is that you should be aware of the boundaries of your knowledge and make decisions primarily within that circle. You don't need to know everything; instead, focus on what you know well.

Knowing the boundaries of your circle is even more vital than its size. As Charlie Munger put it, “What kills you is not what you know, it is what you think you know, but you don’t know.” His partner Warren Buffett echoed this in a motto for investors: “Know your circle of competence and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.” To delineate those boundaries, Buffett suggests thinking in terms of three lists when evaluating opportunities—not just in investing, but in any area:

• In: Areas, businesses, or subjects you understand very well. These lie within your circle.
• Out: Those you’ve tried to understand but couldn’t. You’ve tested the boundary and confirmed it’s outside.
• Too Hard: Those that are simply too complex, where you’re not willing to invest the time to gain deep understanding. These, too, are outside.

Sorting opportunities this way can expose gaps, but a self-assessment still needs evidence from performance and feedback. The real danger is slipping into the “Too Hard” bucket while convincing yourself you belong in the “In” one. A related prioritization tool is the 2-List Strategy: write down your top 25 goals, circle the 5 most important, and then avoid the other 20 at all costs until the top 5 are achieved. This is a prioritization exercise. It can help focus effort, but ranking goals does not establish competence.

How do you build and maintain a circle of competence?

One of the essential requirements of a circle of competence is that you can never take it for granted. You can’t operate as if a circle of competence is a static thing, that once attained is attained for life. The world is dynamic. Knowledge gets updated, and so too must your circle. Your circle should expand slowly over time through deliberate effort.

There are three key practices needed in order to build and maintain a circle of competence: curiosity and a desire to learn, monitoring, and feedback.

First, you have to be willing to learn. Learning comes when experience meets reflection. You can learn from your own experiences. Or you can learn from the experience of others, through books, articles, and conversations. Learning everything on your own is costly and slow. You are one person. Learning from the experiences of others is much more productive. You need to always approach your circle with curiosity, seeking out information that can help you expand and strengthen it.

«Learn from the mistakes of others. You can’t live long enough to make them all yourself.» Anonymous

Second, you need to monitor your track record in areas which you have, or want to have, a circle of competence. And you need to have the courage to monitor honestly so the feedback can be used to your advantage.

The reason we have such difficulty with overconfidence—as demonstrated in studies which show that most of us are much worse drivers, lovers, managers, traders (and many other things) than we think we are—is because we have a problem with honest self-reporting. We don’t keep the right records, because we don’t really want to know what we’re good and bad at. Ego is a powerful enemy when it comes to better understanding reality.

But that won’t work if you’re trying to assess or build your circle of competence. You need to keep a precise diary of your trades, if you’re investing in the stock market. If you are in a leadership position, you need to observe and chronicle the results of your decisions and evaluate them based on what you were trying to achieve. You need to be honest about your failures in order to reflect and learn from them. That’s what it takes.

Keeping a journal of your own performance is the easiest and most private way to give self-feedback. Journals allow you to step out of your automatic thinking and ask yourself: What went wrong? How could I do better? Monitoring your own performance allows you to see patterns that you simply couldn’t see before. This type of analysis is painful for the ego, which is also why it helps build a circle of competence. You can’t improve if you don’t know what you’re doing wrong.

Finally, you must occasionally solicit external feedback. This helps build a circle, but is also critical for maintaining one.

A lot of professionals have an ego problem: their view of themselves does not line up with the way other people see them. Before people can change they need to know these outside views. We need to go to people we trust, who can give us honest feedback about our traits. These people are in a position to observe us operating within our circles, and are thus able to offer relevant perspectives on our competence. Another option is to hire a coach.

Surgeon and writer Atul Gawande described hiring a coach to help him improve his surgical practice. This is terribly difficult for anyone, let alone a doctor. At first he felt embarrassed. It had been over a decade since he was evaluated by another person in medical school. “Why,” he asked, “should I expose myself to the scrutiny and fault-finding?”

The coach worked. Gawande got two things out of this. First, Gawande received something he couldn’t see himself and something no one else would point out (if they noticed it at all): knowledge of where his skill and technique was suboptimal. The second thing Gawande took away was the ability to provide better feedback to other doctors.

It is extremely difficult to maintain a circle of competence without an outside perspective. We usually have too many biases to solely rely on our own observations. It takes courage to solicit external feedback, so if defensiveness starts to manifest, focus on the result you hope to achieve.

How do you operate outside a circle of competence?

Part of successfully using circles of competence includes knowing when we are outside them—when we are not well equipped to make decisions. Since we can’t be inside a circle of competence in everything, when we find ourselves Strangers in a place filled with Lifers, what do we do? We don’t always get to “stay around our spots.” We must develop a repertoire of techniques for managing when we’re outside of our sphere, which happens all the time.

Charlie Munger’s quip, “All I want to know is where I’m going to die so I’ll never go there,” suggests avoiding serious commitments when you cannot assess the risks. When a decision cannot be avoided, seek enough understanding and assistance to handle it responsibly.

There are three parts to successfully operating outside a circle of competence:

1. Learn at least the basics of the realm you’re operating in, while acknowledging that you’re a Stranger, not a Lifer. However, keep in mind that basic information is easy to obtain and often gives the acquirer an unwarranted confidence.
2. Talk to someone whose circle of competence in the area is strong. Take the time to do a bit of research to at least define questions you need to ask, and what information you need, to make a good decision. If you ask a person to answer the question for you, they’ll be giving you a fish. If you ask them detailed and thoughtful questions, you’ll learn how to fish. Furthermore, when you need the advice of others, especially in higher stakes situations, ask questions to probe the limits of their circles. Then ask yourself how the situation might influence the information they choose to provide you.
3. Use a broad understanding of the basic mental models of the world to augment your limited understanding of the field in which you find yourself a Stranger. These will help you identify the foundational concepts that would be most useful. These then serve as a guide to help you navigate the situation you are in.

There are inevitably areas where you are going to be a Stranger, even in the profession in which you excel. It is impossible for our circles of competence to encompass the entire world. Even if we’re careful to know the boundaries and take them seriously, we can’t always operate inside our circles. Life is simply not that forgiving. We have to make HR decisions without being experts in human psychology, implement technology without having the faintest idea how to fix it if something goes wrong, or design products with an imperfect understanding of our customers. These decisions may be outside our circles, but they still have to get made.

In an investing context, the “Too Hard” pile serves exactly this purpose: recognizing that some companies or sectors are not worth your time allows you to put them aside and either avoid them entirely or delegate the decision to a trusted expert who has built the circle you lack. The skill is in honestly sorting opportunities into the right buckets. The 2-List Strategy can help prioritize where to spend your effort. It does not replace checking your understanding or obtaining qualified help with an unavoidable unfamiliar decision.