Your circle of competence describes an area of knowledge where you have deep knowledge and an accurate understanding of reality. This means you know the rules and principles governing it. You have extensive practical experience in it. You know most of what there is to know, what you don’t know, and even what is knowable and unknowable. Building up your circle of competence takes a great deal of deliberate practice–meaning experience and reflection.
When you’re staying within your circle of competence, you make better decisions, can respond more effectively to different challenges, and are more efficient in doing so. Moving outside your circle of competence increases the risk of making mistakes significantly. You overestimate your own expertise and are overconfident in your actions and risk-taking.
Examples
Knowing when to bet
Professional gambling is all about accurately assessing risk and the competence of all players at the table. Dylan Evens provides a great example in his book Risk Intelligence, where he describes how the backgammon player J.P. evaluates the circle of competence of his competition:
“He would make a few deliberate mistakes to see how well his opponent would exploit them. If the other guy played well, J.P. would stop playing. That way, he wouldn’t throw good money after bad. In other words, J.P. knew something that most gamblers don’t: he knew when not to bet.”
Knowing who to listen to
Ray Dalio created a system in his company Bridgewater Associates to make every employee’s circle of competence explicit. Through a tool called the dot collector, every employee can give direct feedback and evaluations to every other employee in a meeting. These votes are aggregated by the system and taken together with the track record of the employee. Thus, a believability metric is calculated for every employee in the relevant areas of expertise. If the believability metric is high, the person moves within their circle of competence and should be considered in decisions listened to if they give feedback. If the believability metric of a person is low, the person moves outside their circle of competence and following their advice is risky.
Application
How to build up your circle
Building up your circle of competence takes a great deal of deliberate practice. Deliberate practice happens when you combine practical experience with reflection, hence learning from experience. This experience can be both from your personal one but also from others. Learning from others through books, conversations, and courses is faster. However, learning from your own practice sticks with you better. Without conscious reflection any experience is basically worthless, since you’re not learning much from it. Unfortunately, reflecting takes a great deal of courage and personal honesty. It’s not easy to confront your insufficiencies and past mistakes. Use a journal or other similar methods to track your experience and make it easy to reflect on. In some cases, external feedback may provide a valuable new perspective. This can be done through coaching or similar methods.
How to de-risk if you’re acting outside of your circle
Acting outside your circle of competence is risky because you don’t know enough to make good decisions and could easily make terrible mistakes. Be extra wary if you’re interacting with someone that has misaligned incentives to yours. In these cases it is easy for the other to take advantage of your ignorance. Take the following steps to de-risk the situation.
The first thing you can do to reduce the risk of acting outside your circle of competence, is learning the fundamentals as fast as possible. You can do this by reading the top books in the subject, taking a crash course, or interviewing experts.
Before engaging with experts, take some time to read up on the subject so that you can ask the right questions and probe their own competence. Ask questions about how they think about the topic instead of looking for the right answers.
Don’t fall into overconfidence just because you’ve learned the basics. You’re still far from an expert. Beware the Dunning Kruger effect.
Lastly, you can use other mental models to gain insights and uncover your blindspots in the subject. Applying fundamental mental models from other disciplines often helps tremendously in navigating the unknown terrain.
Limitation
You can never acquire all knowledge. The circle won’t be complete, and you always have to identify where this is the case and protect yourself against the risk as good as you can. Furthermore, circles of competence aren’t static. In a dynamic world, knowledge gets updated, and your circle contracts if you don’t keep learning and practicing.
Encoding Image
⚠️ The warning signal. The warning “Only for skilled hikers” should give you pause. Here it’s time to reflect how far your circle of competence goes and if you’re stepping outside of it. Most warning signals indicate that going there without the necessary skill contains considerable risk, so beware.
Quotes
“My advice to young men would be not only to concentrate their whole time and attention on the one business in life in which they engage, but to put every dollar of their capital into it.” – Andrew Carnegie
“Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.” – Warren Buffett
“I’m no genius. I’m smart in spots–but I stay around those spots.” – Tom Watson
A single outstanding skill trumps a thousand mediocre ones. Every hour invested into your circle of competence is worth a thousand spent elsewhere. – Rolf Dobelli