Circle of Competence

I think this is one of the basic mental models to have in life.

What are Mental Models:

Mental models are basically how we understand the world. Not only do they shape what we think and how we understand but they shape the connections and opportunities that we see. Mental models are how we simplify complexity, why we consider some things more relevant than others, and how we reason. A mental model is simply a representation of how something works. We cannot keep all of the details of the world in our brains, so we use models to simplify the complex into understandable and organizable chunks. - FS Blog

The more mental model I practice, the more things I will be able to understand and solve.

Circle of Competence is one of the many mental models.

I got to know about this term when I started learning about investing. Let me share what I learned.

I will share my learning in four parts:

1. What is circle of competence?

2. How do I know when I have one?

3. How do I build and maintain one?

4. How do I operate outside of one?

What is circle of competence?

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 speciality to evaluate. That knowledge is a circle of competence.

Being aware of this circle is very important.

This mental model was developed by Warren Buffet and Charlie Munger, two of the wisest people I have read about.

When I am honest about where my knowledge is lacking, I can know where I am vulnerable and where I can improve. Understanding my circle of competence improves decision-making and outcomes.

Knowing the circle, helps me know the boundary of my knowledge.

If I am aware of the limitation of the knowledge, I won't make decisions with over-confidence.

One thing I understand very clearly if I am aware of the circle of competence, the more I will be grounded, connected with reality and I will make fewer mistakes in my life.

Circle of Competence is a discipline to maintain to not make big mistakes in life.

Let me explain this with an example:

If you know a little about trekking, you know that all the big expeditions have some local guides with your group. They are known as Sherpas.

Anyone who has attempted climbing Mount Everest would have much more chances of succeeding if they are guided by a Sherpa. Without Sherpa, climbing Mount Everest is almost impossible.

Why?

Because they are the people who live there, who have climbed the same mountain multiple times, they know the mountain way more than any tourist. Even if the most experienced mountain climber comes to a new mountain, he/she would first find a local to guide them.

Because they know that those people know way more about the particular mountain than anyone else. Those people have an advantage in the circle of competence.

Now, imagine if someone goes to Mount Everest with confidence that I have climbed many mountains, I don't need any local's support, I will do it on my own. I have done my research, I know enough about this mountain too.

What will happen?

99% that person will die.

Why?

Because that was not his/her circle of competence.

This is what the circle of competence is. Mount Everest was an extreme example but everywhere in our life, when we have to take a decision in a particular area, it is preferable to take support of people whose circle of competence lies in that area.

And in normal areas, we do take support.

I don't remove the cavity of my teeth, I give that task to a dentist.

We don't make my own car, I buy it from the car manufacturer.

But there are areas in which we think we know because we are not aware of our circle of competence, and then the decision taken in that area blows back.

For example, in Stock Market, some people are not full-time investors, who don't have any experience, and without proper knowledge, they would buy stocks, because they think they know what they are doing and many times they make big losses.

Just because they are not aware of knowledge and its limitations.

And it is everywhere from the stock market to businesses, even parenting.

Being aware of the edge of the circle is very important.

If you don't have at least a few years and a few failures under your belt, you cannot consider yourself competent in a circle

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

- Within our circle of competence we know exactly what we don't know.

- 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 know what is knowable and what is unknowable and can distinguish between the two.

How do I build and maintain a circle of competence?

First of all, I can never take the circle for granted. The moment I do is the moment I start slipping out of it.

Secondly, it's not a one-time thing. It's not once attained, always will be there. I have to keep learning. It's a mountain without a top.

I need three basic habits to build a circle of competence:

1. Curiosity Without the willingness to learn, I cannot make a circle of competence.
   

2. Monitoring Most of us are much worse drivers, lovers, managers, traders(and many other things) than we think we are 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. The ego is a powerful enemy when it comes to better understanding reality.
   

3. Feedback I must take feedback. Journal can be a great tool for self-feedback, and occasionally I should also take feedback from people. It is critical to break the ego barriers and see where my blind spots are.

How do I operate outside the circle?

What to do when I have to act outside my circle of competence?

- Learn at least the basics, while being aware that I am a stranger.

- Talk to people who have a strong circle of competence in the area

- Use a broad understanding of the basic mental models of the world. It will help in understanding the foundational concepts that would be useful.

Note to me: My circles of competence can't encompass the entire world. Even if I am careful and hard-working, I can't know everything. I have to know the boundaries and take them seriously, I can't always operate inside my circles.

Ignorance more often begets confidence than knowledge - Charles Darwin

All the credit goes to The Great Mental Models -1 by Farnam Street chapter 2 Circle of Competence, The School of Life and Farnam Street Blog.