The concept of the Circle of Competence mental model is having deep knowledge in certain areas of life, built up over time by combining study and experience; a specialization or passion.
When you evaluate your Circle of Competence in relation to a specific challenge, consider verifiable data and your history in relevant areas, instead of what you feel you are capable of.
Where this becomes a mental model is in defining the boundaries of your own circle of competence and spending the majority of your time making the most of it. It’s where you know that you know.
This model is very helpful in discerning when you can trust your gut and when to go slow and look deeper. “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
It’s also a risk management tool. You minimize risk and maximize your informational advantage by working within your circle. However, you grow outside your comfort zone, which is often also outside your circle. There you would take fewer and smaller risks, but not avoid risk completely.
You could use the 80/20 rule here: 80% inside your circle, 20% outside, pushing your boundaries and growing your circle.
Actionable Takeaways:
Sources for additional reading:
https://fs.blog/circle-of-competence/ https://modelthinkers.com/mental-model/circle-of-competence
https://en.wikipedia.org/wiki/Circle_of_competence
https://www.youtube.com/watch?v=eIUFGSbaxg8
https://nesslabs.com/circle-of-competence
https://thedecisionlab.com/biases/dunning-kruger-effect
Transcript:
Hi, we are back live. Ooh, what Another mental model. Oh, cool. This is one of the really fundamental mental models. Fun. Ooh, that’s a mouthful. Basic. Like really key and, and we’re standing on the shoulders of giants. With Charlie Munger and standing on the
shoulders of Charlie Munger and his more famous partner, Warren Buffet.
Okay, this is a big one in their world. So it, the concept is, or the, the mental model is Circle of Competence. And the basic concept of that is having a deep knowledge in certain areas of. Right. And, and that’s, it’s not something that you just go read a couple of books and, okay, now I’m an expert, right?
This is something that you build up over time with, you know, both study and a lot of experience. And, and so, okay. It’s one of those oftentimes it’s, it’s an area where we have you know, a real deep interest or passion. Oh, okay. And so it’s just natural for us. And another, it’s also easy to overlook those as being part of ourself circle of competence because it become so easy.
Yeah. It comes easy or it’s just, yeah. I’ve always done that. Like him and computers me not so much computing. Computers are definitely my circle of co in my circle of competence. Yeah. And the kitchen. Not, he knows where it’s at. Yes. But you have no circle of confidence. And I, and I know where to put the dishes away.
Yeah. If I do it. Okay. So getting back to the circle of competence, it’s yeah, it’s a specialization, our past. Oh, okay. All right. So step one is to evaluate your circle of competence. What, knowing what it is, where the boundaries are, is that the same thing as. It includes, yes. So, okay. In, in relationship, you know, like if you’re, if you’re facing a particular challenge something has come up and you wanna, you’re trying to decide, do I do this or do I invest in this or, or whatever.
You need to think about what’s verifiable, verifiable data and in your history rather than, What you just feel like you’re capable of. Okay. Okay. And so that come, that, that is bringing in, I’ve gotta bring in a, a, a cognitive bias here. Okay. Because there’s a famous one called the Dunning Krueger Effect.
Ooh, yes. When it’s got two names, it’s gotta be fancy, right? So the Dunning-Kruger Effect is where we have the natural tendency, this, this built in bias to overestimate either our knowledge or our capabil. Oh, I never, and, and you ask a bunch of people, you know, to rate themselves in a particular area, and they will always rate themselves higher than their actual skill level or knowledge.
Okay. We’ve done a bunch of this. I might have done that maybe once. It’s, and it’s not, I, I mean, I I hear you. And, and so I’m, you know, my mind’s going to, you know, some blow hard, right. And, and we’ve all known a, a blow hard that just, you know, they’re an expert in everything. It’s not, that’s an extreme, but that would be an illustration of the Dunning-Kruger event.
Okay. Okay. So back to Circle of Competence. We wanna make sure that when we are taking something on Uhhuh, that we are, we understand our circle of competence. That, that it’s verifi. You know, by, by our, there’s evidence, external evidence, other people and, and our past history. Okay. Okay. All right. When this where this becomes a mental model and not just a concept is when we then define the, the boundaries of our circle of competence and, and then using it, applying it is spending the majority of our time within that.
Oh, it’s, it’s where you know that, you know. Okay. Okay. So it’s, it’s also very helpful in discerning where when you can trust your gut and when you need to slow down and, and look a little deeper, you know, so like, go more carefully so when you know that you’re, you know, that, you know, And, and you can trust your gut.
True. Right? And you, you can think that that’s, we’ve talked about fast thinking and slow thinking and, and the fast thinking system is what we use most of the time. Yeah. When we know we’re out of our depth. If we’ve defined our circle of competence and we know we’re we’re in an area that we’re out of our depth, then it’s, then we know it’s time to slow down.
So this, you see how this is tying into other, other things we’ve talked about. Look at you. Woo. It’s a clever. So I wanna read a quote from Charlie Munger. Okay. “I don’t play in a game where 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.” So that’s pretty darn wise. That leads right into this, is that risk management tool. Oh, okay. This, this circle of competence, you can, you can minimize your risk and maximize your informational advantage. That’s what he was really just talking about.
Right, right. Informational advantage is a huge thing. Yeah. Where I’m, you know, “where I’m wise and they’re stupid” is the way he described it, but by, by staying inside your circle of competence. Right. Especially in terms of investing Munger and Buffett. Talked about it in terms of, in one of the articles that I’ll put in the sources.
Okay. Talked about, reading a lesson from Ted Williams book about hitting baseball hitting. He actually broke down the strike zone into 70 different areas, and he figured out just exactly where in that strike zone was his real sweet spot for his body, the way he swung and everything. And, and then he only swung at the things that were at that, in that sweet spot.
And by the way, and that’s his aunt and his mother knew Ted when he was Yes. And so, so the way the, these masterful investors look at that uhhuh or use that concept is to go where they know a lot and, and only invest there. So if, if, for example, if they were, you know, really expert in the oil and gas industry, maybe cuz they’d worked in it 20 years.
I’m just, I’m making something up. I don’t, okay. I’m not saying they, that’s their thing, but someone who has worked in the oil and gas industry for 20 years is more likely to be a savvy investor in that. Then, then if they then go somebody like me, then, then if they go into food products or, you know, makeup, like Avon or whatever, you know as far as being able to really make a, you know, sharp, smart decisions about not only, you know, where a company is and the, the soundness of a company.
Right. So I’m over waving my hand in the air behind your back. Sorry. Oh, that’s okay. Well I can do the thing. Oh my goodness. Okay. And you just me. So. The, so the other side of the coin here is that if we only play for all the time in our comfort zone, our, our circle of confidence, then we don’t grow.
Yeah. So this, this circle of competence is not a static thing. It’s something that we can expand, right. It’s just not something we can expand rapidly. Okay. We can, we can grow it over time by, by getting, you know, going to the edges, getting just a little outside the edges and taking a little risk where we’re, you know, where we’re outside.
So, okay. In terms of risk, you, you could look at it as the 80/20 apply the 80/20 principle, right? You could spend 80% of your time in your zone of competency, your circle of competence, and, and. That’s where you would take your more calculated, predictable risks. And then 20% of the time you could, you know, try smaller, smaller amount of risk and also fewer fewer times that you would be outside your circle of competence, and that’s how you would grow it.
Okay. Make sense? Yeah. Okay. Cool. All right, so actionable takeaways. Mm-hmm. Okay. Play to your strengths. Real simple. I like that. You know, play to your strengths. We’ve all heard that this is, you know, a specific way to do that. Right? Okay. Use your passions and your interests to help identify your circle of competence.
We covered that, right? Supplement yourself with diversity. Meaning locate other people and identify their circle of competence and build your, your team Oh, around you. So where, where you’re not strong guys. Build a team of, of people that are strong in those different areas. Okay. That makes sense. In business, that’s like, you know, you want to have a, a really good attorney in a really good CPA and a, you know, Right.
A really good financial advisor. Right. I mean, that’s like a core team. Really good coach and, and a really good. Her, she’s a really good coach. So then engage with those people, you know, from their circle of competence where wherever you can play to other people’s strengths, meaning engage them in their areas of strength, let’s support them and, and try to avoid the Dunning Kruger effect in others.
There you go. We really need to do that one. Don’t be afraid to say, I don’t know, but I’ll find out. That’s the key. Oh, yeah. I, I have, I don’t know, but I’ll find out. Well, there’s a whole, you know, there’s another framework there, right? With the, the, I don’t know, there can be some self-judgment and some, yeah.
And, and some certainty about, I don’t know, and I might never know. Okay. True, true. And, and that’s where, if we say, but I’ll find out. Now we’re taking action. There we go. Okay, we’re moving forward and we are, we’re that’s more growth oriented. And then grow and learn. Expand your circle. Cool. So hopefully this has been, it’s been fun, enlightening and helpful to you, and we’ll see you in another video.
Thanks.
Jay Barrett says:
Great stuff!