Circle of Competence
Understand the limits of your knowledge and operate within areas where you have expertise.
What It Is
The Circle of Competence is a mental model that emphasizes understanding the boundaries of your knowledge and expertise. It suggests that you should focus on areas where you have deep understanding and avoid making decisions in areas where you lack expertise. The key is not how large your circle is, but knowing where its boundaries lie.
Why It Matters
Operating within your circle of competence dramatically increases your chances of success and reduces costly mistakes. Warren Buffett attributes much of his investment success to staying within his circle and passing on opportunities he doesn't understand. It also helps you identify when you need to expand your knowledge or seek expert advice.
How to Apply It
- 1
Honestly assess areas where you have deep knowledge versus superficial understanding
- 2
Make important decisions primarily within your circle of competence
- 3
When venturing outside, acknowledge your limitations and proceed with extra caution
- 4
Continuously work to expand your circle through deliberate learning and experience
Example
Warren Buffett avoided investing in technology companies for decades because he felt they were outside his circle of competence. While he missed some opportunities, he also avoided the dot-com bubble crash. He only invested in Apple after understanding its business model deeply and recognizing it had become more of a consumer products company.