The Difference between what you think you know vs. what you actually know
A circle of competence is the a model that explains what matches a person’s skills and expertise. Understanding your circle of competence helps you avoid problems, identify opportunities for improvement, and learn from others.
The mental model was made popular by Charlie Munger and Warren Buffet to describe limiting one’s financial investments in areas where the individual might have lower levels of understanding and focusing on areas where the individual has more familiarity. This helps in laying importance to their own competencies and functioning around it so that the individual might have an upper hand. However, this model is not only applicable to making investment decisions but real life as well.
Buffett summarized the concept by saying —
“Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.”
We gain knowledge on various subjects by experience and study and based on the knowledge that we accumulate over time, we take daily decisions . Some subjects require more in-depth knowledge to master and what the model suggests is that we stick to our strengths while expanding on our knowledge base slowly rather than diving into an unknown territory. He suggests that, the circle of competence can be widened, but only slowly and over time. Mistakes are most often made when straying from this discipline.
Inside the circle of competence lie the skills that one has honed and mastered over a period of time, throughout one’s career or life. Beyond the circle are things that one one knows or doesn't understand fully. The skills that we’ve mastered are the smaller circle and the things that we know of, but are not our competencies is the bigger circle. The inner circle eventually will grow bigger but, we should always aim at doubling down our efforts on focusing on our competencies because that is one area that no one else can beat you.
Buffet also said that—
“I think about things where I have an advantage over other people. I don’t play in a game where the other people are wise and I’m stupid. I look for a place where I’m wise and they’re stupid. You have to know the edge of your own competency. I’m very good at knowing when I can’t handle something.”
Charlie Munger also takes this concept outside of business altogether and applied it to real life. He tried to answer the question of what to spend most of your time on by saying —
“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 . 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.”
The way we can use this model to our benefit by applying to real life is by defining the boundaries of our knowledge/competencies and and doubling down upon your strengths. Over time one can work towards expanding the perimeter of your inner circle but the focus should still remain on the strengths.
In the end, a single outstanding skill trumps a thousand mediocre ones. Every hour invested into your circle of competence is worth a thousand spent elsewhere.
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