From Shane Parrish’s “The Great Mental Models”
Circle of Competence
“When ego and not competence drives what we undertake, we have blind spots. If you know what you understand, you know where you have an edge over others. When you are honest about where your knowledge is lacking you know where you are vulnerable and where you can improve. Understanding your circle of competence improves decision-making and outcomes.”
“What is a circle of competence? Imagine an old man who’s spent his entire life up in a small town. He’s the Lifer. No detail of the goings-on in the town has escaped his notice over the years. He knows the lineage, behavior, attitudes, jobs, income, and social status of every person in town. Bit by bit, he built that knowledge up over a long period of observation and participation in town affairs.”
“Now imagine a Stranger enters the town, in from the Big City. Within a few days, the Stranger decides that he knows all there is to know about the town.”
“In the Stranger’s mind, he’s convinced he pretty much knows everything a Lifer would know. He has sized up the town in no time, with his keen eye. He makes assumptions based on what he has learned so far, and figures he knows enough to get his business done. This, however, is a false sense of confidence that likely causes him to take more risks than he realizes.”
“The difference between the detailed web of knowledge in the Lifer’s head and the surface knowledge in the Stranger’s head is the difference between being inside a circle of competence and being outside the perimeter. True knowledge of a complex territory cannot be faked. The Lifer could stump the Stranger in no time, but not the other way around.”
“What happens when you take the Lifer/Stranger idea seriously and try to delineate carefully the domains in which you’re one or the other? There is no definite checklist for figuring this out, but if you don’t have at least a few years and a few failures under your belt, you cannot consider yourself competent in a circle.”
“How do you know when you have a circle of competence? Within our circles of competence, we know exactly what we don’t know. We are able to make decisions quickly and relatively accurately. We possess detailed knowledge of additional information we might need to make a decision with full understanding, or even what information is unobtainable. We know what is knowable and what is unknowable and can distinguish between the two.”
“There are three key practices needed in order to build and maintain a circle of competence: curiosity and a desire to learn, monitoring, and feedback.”
“First, you have to be willing to learn. Learning comes when experience meets reflection. You can learn from your own experiences. Or you can learn from the experience of others, through books, articles, and conversations. Learning everything on your own is costly and slow. You are one person. Learning from the experiences of others is much more productive. You need to always approach your circle with curiosity, seeking out information that can help you expand and strengthen it.”
“Second, you need to monitor your track record in areas which you have, or want to have, a circle of competence. And you need to have the courage to monitor honestly so the feedback can be used to your advantage. The reason we have such difficulty with overconfidence—as demonstrated in studies which show that most of us are much worse drivers, lovers, managers, traders (and many other things) than we think we are—is because we have a problem with honest self-reporting.”
“We don’t keep the right records, because we don’t really want to know what we’re good and bad at. Ego is a powerful enemy when it comes to better understanding reality. But that won’t work if you’re trying to assess or build your circle of competence. You need to keep a precise diary of your trades, if you’re investing in the stock market. If you are in a leadership position, you need to observe and chronicle the results of your decisions and evaluate them based on what you were trying to achieve.”
“Keeping a journal of your own performance is the easiest and most private way to give self-feedback. Journals allow you to step out of your automatic thinking and ask yourself: What went wrong? How could I do better? Monitoring your own performance allows you to see patterns that you simply couldn’t see before. This type of analysis is painful for the ego, which is also why it helps build a circle of competence. You can’t improve if you don’t know what you’re doing wrong.
“Finally, you must occasionally solicit external feedback. This helps build a circle, but is also critical for maintaining one. A lot of professionals have an ego problem: their view of themselves does not line up with the way other people see them. Before people can change they need to know these outside views. We need to go to people we trust, who can give us honest feedback about our traits.”
“It is extremely difficult to maintain a circle of competence without an outside perspective. We usually have too many biases to solely rely on our own observations. It takes courage to solicit external feedback, so if defensiveness starts to manifest, focus on the result you hope to achieve.”
“The problem of incentives can really skew how much you can rely on someone else’s circle of competence.”
“Whenever we are getting advice, it is from a person whose set of incentives is not the same as ours. It is not being cynical to know that this is the case, and to then act accordingly.”
.