Tag: Circle of Competence

The Distrust of Intellectual Authority

It’s getting harder to have the expertise necessary to navigate every arena in our lives independently. Sometimes, we need to defer to the expertise of others, but how do we know who to trust?

We are a culture of explainers. You’ve met them and so have I—the people who think they’re more informed than the experts, always happy to share their thoughts with anyone who will listen. Such people sometimes were considered quirky, even endearing, because they meant well and were usually few and far between. However, “the public space is increasingly dominated by a loose assortment of poorly informed people,” writes Tom Nichols in his excellent book The Death of Expertise.

There is an intellectual Gresham’s Law emerging, as misinformation overtakes knowledge.  But this isn’t really a new thing. The conflict between people who know and people who believe they know isn’t always so obvious, but as the gap between experts and the general citizenry grows, so too does the mistrust.

In some cases, ignorance has become hip. Consider the flat Earth movement, vaccines, or the raw milk craze of a few years ago. Rejecting the advice of experts has become a cultural symbol. Why listen to doctors about vaccines, or the Center for Disease Control about the hazards of raw milk? And don’t even get me started on the shape of the Earth.

Spanish philosopher Jose Ortega y Gasset in 1930 decried the “revolt of the masses,” writing:

Thus, in the intellectual life, which of its essence requires and presupposes qualification, one can note the progressive triumph of the pseudo-intellectual, unqualified, unqualifiable, and, by their very mental texture, disqualified.

I may be mistaken, but the present-day writer, when he takes his pen in his hand to treat a subject which he has studied deeply, has to bear in mind that the average reader, who has never concerned himself with this subject, if he reads, does so with the view, not of learning something from the writer, but rather, of pronouncing judgment on him when he is not in agreement with the commonplaces that the said reader caries in his head.

Ortega y Gasset attributed the increasing numbers of the ignorant public to prosperity, among other things. It’s hard to argue with success. Technology, secondary education, and the emergence of the United States as a global power undermine the idea that average individuals are ill-equipped to decide for themselves. And yet those powerful forces also have demanded that individuals develop specialized expertise that conflicts with broader competence. Sometimes, we must even be content to know what we don’t know, and trust other experts.

In the 1960s, political scientist Richard Hofstadter wrote that “the complexity of modern life has steadily whittled away the functions the ordinary citizen can intelligently and competently perform for himself.” In his book Anti-Intellectualism in American Life, Hofstadter points out with concern that

In the original American populistic dream, the omnicompetence of the common man was fundamental and indispensable. It was believed that he could, without much special preparation, pursue the professions and run the government.

Today, he knows that he cannot even make his breakfast without using devices, more or less mysterious to him, which expertise has put at his disposal; and when he sits down to breakfast and looks at his morning newspaper, he reads about a whole range of issues and acknowledges, if he is candid with himself, that he has not acquired the competence to judge most of them.

This overwhelming complexity of modern life “produced feelings of helplessness and anger among a citizenry that knew itself increasingly to be at the mercy of smarter elites,” writes Nichols. And Hofstadter warns, “What used to be a jocular and usually benign ridicule of intellect and formal training has turned into a malign resentment of the intellectual in his capacity as expert. Once the intellectual was gently ridiculed because he was not needed; now he is fiercely resented because he is needed too much.”

Don’t get me wrong. Reasoned skepticism and disagreement are essential to progress and democracy. The problem is that most of what’s happening isn’t reasoned skepticism. It’s the adult equivalent of a two-year-old throwing a tantrum.

Sometimes experts are wrong and the common citizen is right, but those occasions are few and far between. What’s growing is our inability to distinguish between experts being wrong occasionally and experts being wrong consistently. Participants in public debate search for loopholes and exceptions—anything that provides an excuse to disregard opinions they don’t like.

This sets up binaries and polarities, demanding that things be either true or false. This eliminates nuance. The reality is that most expert opinions are true at least in part, and the real value in disagreement is not dismissing the thing entirely, but taking the time to argue the weak points to make the overall better.

Laypeople would do well to remember that reasoned disagreement is what moves us forward. Not every idea has to be complete and completely defensible right from the beginning. It is because we question and push ideas that we make the progress that we do. Experts would do well to remember that they may be masters of their fields, but they are servants to society. Mastery means nothing without trust and engagement.

It’s intellectual hubris to think that with a few minutes of googling our opinions are on par with people who have spent their lives in a domain. And yet we’ve been taught that we are entitled to our own opinion and that it deserves equal weighting. Sure you hold your own opinion, but it doesn’t deserve equal weighting.

Understanding your Circle of Competence: How Warren Buffett Avoids Problems

(c)2018 Farnam Street Media Inc. May not be used  without permission.

Understanding your circle of competence helps you avoid problems, identify opportunities for improvement, and learn from others.

The concept of the Circle of Competence has been used over the years by Warren Buffett as a way to focus investors on only operating in areas they knew best. The bones of the concept appear in his 1996 Shareholder Letter:

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 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.

Circle Of Competence

Circle of Competence is simple: Each of us, through experience or study, has built up useful knowledge on certain areas of the world. Some areas are understood by most of us, while some areas require a lot more specialty to evaluate.

For example, most of us have a basic understanding of the economics of a restaurant: You rent or buy space, spend money to outfit the place and then hire employees to seat, serve, cook, and clean. (And, if you don’t want to do it yourself, manage.)

From there it’s a matter of generating enough traffic and setting the appropriate prices to generate a profit on the food and drinks you serve—after all of your operating expenses have been paid. Though the cuisine, atmosphere, and price points will vary by restaurant, they all have to follow the same economic formula.

That basic knowledge, along with some understanding of accounting and a little bit of study, would enable one to evaluate and invest in any number of restaurants and restaurant chains; public or private. It’s not all that complicated.

However, can most of us say we understand the workings of a microchip company or a biotech drug company at the same level? Perhaps not.

“I’m no genius. I’m smart in spots—but I stay around those spots.”

— Tom Watson Sr., Founder of IBM

But as Buffett so eloquently put it, we do not necessarily need to understand these more esoteric areas to invest capital. Far more important is to honestly define what we do know and stick to those areas. Our circle of competence can be widened, but only slowly and over time. Mistakes are most often made when straying from this discipline.

Circle of Competence applies outside of investing.

Buffett describes the circle of competence of one of his business managers, 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 with that focus could she have overcome her handicaps to achieve such extreme success.

In fact, Charlie Munger takes this concept outside of business altogether and into the realm of life in general. The essential question he sought to answer: Where should we devote our limited time in life, in order to achieve the most success? Charlie’s simple prescription:

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.

So, the simple takeaway here is clear. If you want to improve your odds of success in life and business then define the perimeter of your circle of competence, and operate inside. Over time, work to expand that circle but never fool yourself about where it stands today, and never be afraid to say “I don’t know.”

Circle of Competence is part of the Farnam Street latticework of mental models.