The difficulties of defining our circles of competence — and how knowing them will mean you make smarter decisions.

Defining your circle of competence

In life, it is an enormous advantage to play the games you’re good at. A fish will perform terribly at the tree-climbing olympics, but it’d beat a monkey at swimming every time. If you want to improve your chances of success at anything, begin by defining your circle of competence as accurately as you can — then play within it. If you are a fish, swim. Don’t climb trees.

“I am no genius. I am smart in spots — but I stay around those spots.” -Tom Watson Sr, Founder of IBM

This is such an obvious idea but somehow we don’t live by it. I don’t live by it. Warren Buffett and his partner Charlie Munger do, and they teach it every chance they get. For long, the two did not invest in attractive high-tech companies. They chalked this down to their “personal inadequacies” and “lack of any great advantages” in the tech sector. The world’s greatest investors said no to shiny, early Microsoft stock because they didn’t understand the stuff. Bill Gates even invited Buffett to his summer home in 1991, explaining how personal computers would change everything:

Gates: “You’ve got to have a computer.”

Buffett: “Why?”

Gates: “You can keep track of your stock portfolio.”

Buffett: “I only own one stock [Berkshire Hathaway].”

Gates: “Well, you can do your taxes.”

Buffett: “I don’t have any income. Berkshire doesn’t pay a dividend.”

Gates: “It’s going to change everything.”

Buffett: “Will it change whether people chew gum?”

Gates: “Probably not.”

Buffett: “Well, then I’ll stick to chewing gum, and you stick to computers.”

It was outside his circle of competence, so he didn’t do it. In hindsight, he would have made a fortune investing in Microsoft that early — despite not understanding the company. But that would have been luck, something you can’t rely on. Reliably, he made billions working inside his circle of competence.

What guides your decision making?

You do not know everything — good thing is you do not need to. You are not good at everything — you do not have to be. You do not have to be right about thousands of things. Here’s what matters: being able to decide what things you’re able to come to an intelligent decision on — and which ones are beyond your capacity.

Here’s Buffett discussing this at Notre Dame, also in 1991:

I would say that the most important thing in business, and investments, which I regard as the same thing, is being able to accurately define your circle of competence. It isn’t a question of having the biggest circle of competence. I’ve got friends who are competent in a whole lot bigger area than I am, but they stray outside of it.

 — Warren Buffett

So it’s not the size of your area of competence that matters, but recognising when you are straying outside of it. Here, he applies this mental model to business. But this is a decision making tool you can apply to the rest of life.

You have areas where you are really good, where you truly know your stuff, where you have special competence. You also have areas where you’re not as competent. Your job is to find this universe of things you understand, things you’re good at, and work within it.

Here’s Munger in 1994, applying this model more widely:

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.

 — Charlie Munger

This bears repeating: if you are a fish, swim. Don’t climb trees. This is not to say do not seek to expand your circle of competence. Rather, realise the circumference of your area of competence even as you seek to expand it. And try not fool yourself that it is wider than it is.

Why do we fail to do this?

Playing within your own circle of competence is such a common-sense idea that gives your chances of success an enormous boost. So why don’t we do it all the time? Why do we spend so much of our time outside of our circles of competence while good sense (and Warren Buffett) tell us we’ll succeed if we do the opposite?

I have found that we have a set of hindering notions we have to unlearn, and a set of psychological impediments to look out for:

1) We think we know more than we do. We are victims of our inflated self-assessment. It is easier to overestimate what you know — or to underestimate what you don’t know — than it is to accurately define the borders of your knowledge. Psychologists call this the Dunning-Krueger effect. Incompetence has a double curse: the first is that you are incompetent, the second is that this selfsame incompetence blocks you from knowing you are incompetent.

“The skills you need to produce a right answer are exactly the skills you need to recognize what a right answer is.” — David Dunning

Dunning, one of the psychologists who lend this effect its name, tells the true story of a dumb bank robber who thought applying lemon juice to his face would make him invisible to security cameras. He was caught (surprise!) but was genuinely astonished at how quickly and easily they found him. “But I wore the juice! How did you catch me?,” he asked the police. Since lemon juice is used as an invisible ink, he had convinced himself that the lemon juice made him invisible. Here was a guy who was not only too stupid to be a bank robber, his stupidity protected him from realising the level of his stupidity.

We laugh at this poor robber’s ineptitude but we often fail to recognise our own incompetence, only in less hilarious ways. We overestimate our abilities. This is the first psychological wall we have to break through as we define our circles of competence.

2) Along similar lines, we think knowing everything is a good goal to have. Many of us are held back by a misplaced belief in the value of knowing everything. It is easy these days to fancy yourself a renaissance man. Google in our pockets, and the half-baked fragments of a million ideas in our heads, make us feel that we know a lot more than we actually do. We are a generation of self-perceived polymaths.

The ideal version of you knows everything. The real you has limits. The real you is good at some things, and not so good at many others. As long as you can honestly and accurately assess the borders of what you are (or can be) good at, you have the recipe for all the success you’ll want. Realising this is freeing.

Munger expands his thoughts from earlier:

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 some edges can be acquired. And the game of life to some extent for most of us is trying to be something like a good plumbing contractor in Bemidji. Very few of us are chosen to win the world’s chess tournaments.

— Charlie Munger

3. We have too many options. We think more options means betteroptions. We have a hard time focusing on our areas of special competence because we have too many options to pick from. Especially in today’s world, options are limitless. We are blasted with shock waves of information every second — here’s what you can do, here’s what you can do, here’s what you can do. Here is a business you can invest in. Here’s the cryptocurrency to buy. Here’s how to make passive income. Here’s a must-see film. Here’s a must-think thought. Here’s a chance to expand your skillset. Here, here, here.

Often, having more options merely gives us more anxiety and leaves us less satisfied. It also means we have less focus — a factor many successful people attribute as the number-one reason for their success. You’ve got to learn to focus on your circle of competence. And you’ve got to learn to say no to the stuff outside your area of focus.

People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.

- Steve Jobs

What are some things you’ll say “no” to today? (There’s another Buffett tool called ‘the 5/25 Rule’ that can help you say no and sharpen your focus. By Buffett, of course.)

Climbing perch are terrifyingly incredible. Other fish should stick to water, though.

4) We are taught to admire the guy who wins against the odds. We idolise the unlikely and the outlier. The climbing gouramies are a family of fish that can crawl across dry land and live out of water for six days. That’s incredible. They can live in a dry muddy creek for six months. That’s even more incredible. Thing is, most fish in the world should stick to the water. They are more likely to find great success swimming than trying to crawl on land. You are better served figuring out where you have an edge, and playing your advantages hard!

What can we do?

To be able to accurately define our circles of competence, we need to unlearn these four hindering notions. In each case, do the opposite. (1) When assessing yourself, realise your incompetence may be blocking you from recognising its own full extent. (2) Remember: you don’t need to know everything. You do not need to be right about a million things. (3) Focus. Say no to the shiny ideas that’ll derail you from your chosen purpose. And, (4) stop trying to be a tree-climbing fish. Recognise where your advantages lie. Go work there.

You need very few good ideas in your lifetime. You have to be willing to have the discipline to say, “I’m not going to do something I don’t understand.” Why should I do something I don’t understand?

— Warren Buffett

Why should you do things you don’t understand? This is the simple truth for you to take home. To improve your odds of success, begin by defining the boundaries of your circle of competence. If you’re a fish, swim. Don’t climb trees.