Understanding where you have an edge and where you don’t can help you prevent problems, spot opportunities others miss, and rapidly learn.
We all have a circle of competence – an area in which we have a lot of earned knowledge.
The size of that circle is not important. What is important is knowing when you are approaching the perimeter.
Within your circle of competence, you operate with an advantage. As you approach the perimeter (the limitations of your knowledge), your advantage starts to reduce. As you cross the perimeter, not only does your advantage vanish, but it transfers to other people. Suddenly, you find yourself playing in an area where others have an edge.
Just because you are good at something doesn’t mean you are good at everything. A Grandmaster in chess is at home on the chessboard, but those skills don’t translate into being competent in other areas of life, such as cooking in the kitchen. In fact, it’s often the case that extreme skills in one area create extreme weaknesses in others.
As we cross the perimeter from what we know to what we don’t, confidence does not diminish as fast as competence. The biggest risk when operating outside of your circle of competence is what you don’t see.
While most people are concerned with the size of their circle, it’s a lot more important to know when you are approaching the perimeter.
Circle Of Competence
Warren Buffett described circle of competence using one of his former business managers, Rose Blumkin, a Russian immigrant with poor English who built the largest furniture store in Nebraska:
I couldn’t have given her $200 million worth of Berkshire Hathaway stock when I bought the business because she doesn’t understand stock. She understands cash. She understands furniture. She understands real estate. She doesn’t understand stocks, so she doesn’t have anything to do with them. If you deal with Mrs. B in what I would call her circle of competence… She is going to buy 5,000 end tables this afternoon (if the price is right). She is going to buy 20 different carpets in odd lots, and everything else like that [snaps fingers] because she understands carpet. She wouldn’t buy 100 shares of General Motors if it was at 50 cents a share.
It did not hurt Mrs. B to have such a narrow area of competence. In fact, one could argue the opposite. Her rigid devotion to that area allowed her to focus. Only by focusing on one thing could she overcome her handicaps and achieve such extreme success.
Charlie Munger applies the concept to life in general. He sought to answer the essential question: Where should we devote our limited time to achieve the most success?
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 can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.
If you want to be the best tennis player in the world, you may start out trying and soon find out that it’s hopeless—that other people blow right by you. However, if you want to become the best plumbing contractor in Bemidji, that is probably doable by two-thirds of you. It takes a will. It takes the intelligence. But after a while, you’d gradually know all about the plumbing business in Bemidji and master the art. That is an attainable objective, given enough discipline. And people who could never win a chess tournament or stand in center court in a respectable tennis tournament can rise quite high in life by slowly developing a circle of competence—which results partly from what they were born with and partly from what they slowly develop through work.
It becomes easier to stay within your circle of competence when you focus on outcome over ego.
To improve the odds of success in life and business, understand the perimeter of your circle of competence and operate well inside. Over time, work to expand that circle, but don’t fool yourself about where the perimeter is, and never be afraid to say, “I don’t know.”
Circle of Competence is part of the Farnam Street latticework of mental models.