What is Circle of Competence?
Circle of Competence is a mental model popularized by Warren Buffett and Charlie Munger. The basic idea is simple: each of us has areas where we have deep knowledge and experience, and areas where our knowledge is lacking or superficial.
Key principles:
- Knowing the boundaries of your competencies is more important than having a wide circle of competencies
- Success often comes not from expanding the circle, but from consistently respecting it
- Outside our circle of competence, we are more prone to errors in judgment
Why is it important?
Most major decision-making mistakes occur when we enter an area outside our circle of competence without realizing it. We overestimate our knowledge and underestimate the complexity of the problem.
“Knowing the edge of your competency is more important than being smart.” — Charlie Munger
How to apply the model?
1. Map your circle
Ask yourself:
- In which areas do I have proven results?
- Where do I have deeper knowledge than most people?
- Where have I made most of my mistakes?
2. Respect the boundaries
When making decisions outside your circle:
- Admit that you don’t know
- Seek out experts
- Be more conservative in your estimates
3. Expand your circle systematically
If you want to expand your circle of competence:
- Invest time in deep learning
- Gain practical experience
- Learn from those who are already there
Practical applications
In investing: Buffett only invests in businesses he understands. That’s why he avoided technology stocks for a long time.
In career: Focus on developing in an area where you already have an advantage, rather than trying to be average at everything.
In decision-making: Before any major decision, ask yourself: “Is this inside or outside my circle of competence?”
Conclusion
Circle of Competence is not about being modest or limiting yourself. It’s about strategically leveraging your strengths and consciously managing risks where your knowledge falls short.