What is the Circle of Competence?

The concept in one sentence:

You are more likely to succeed in areas where you have expertise.

The concept in one quote:

Investors who confine themselves to what they know, as difficult as that may be, have a considerable advantage over everyone else.

Seth Klarman

The concept in one image:

How I use it?

I have a hard time delegating tasks, especially when the overall project is my responsibility. Knowing my circle of competence helps me remember that I should focus on what I know best and delegate the rest.

Examples

Example 1

Your friend wants to open a restaurant but has limited knowledge of the business & industry.

Which is more likely?

1. Your friend will succeed.

2. Your friend will fail.

Answer:

The correct answer is option 2.

The lack of expertise increases the chances that your friend will make mistakes, which over time can kill the restaurant.

Example 2

Kate is the head of digital marketing at her company. She has worked in that role for 10 years.

Which technical skill is likely to be in her Circle of Competence?

1. Coding

2. Search Engine Optimization (SEO)

3. Geometry

4. User experience design

Answer:

The correct answer is option 2.

SEO is a digital marketing strategy.

Example 3

Your brother wants to invest his savings in the stock market. He has no experience.

Which is more likely?

1. Your brother will make lots of money.

2. Your brother will lose lots of money.

Answer:

The correct answer is option 2.

The lack of expertise increases the chances that your brother will pick bad stocks, which over time will lose in value.

Exercises

Exercise 1

Your dad is a surgeon. He wants to retire and open a coffee shop.

Which is more likely?

1. Your dad will succeed.

2. Your dad will fail.

Exercise 2

Joe is a professional basketball player. He wants to quit and go play football next year.

Which is more likely?

1. Joe will succeed in football.

2. Joe will fail in football.

Exercise 3

Ashley is an author.

Which technical skill is likely to be in her Circle of Competence?

1. QA testing

2. Photoshop

3. Ghostwriting

4. Singing

Exercise 4

Daniel is an economist. He plans to start a food blog.

Which is more likely?

1. Daniel will attract an audience.

2. Daniel won't attract an audience.

Exercise 5

Sophie is a well-known biologist. She wants to start a biotech company.

Which is more likely?

1. Sophie will succeed.

2. Sophie will fail.

Exercise 6

Eric has been programming websites for 20 years.

Rank the competencies below from most to least likely in his Circle

1. Baking

2. Search Engine Optimization (SEO)

3. Coding

4. Wizard

Exercise 7

Peter has studied the construction business & industry for the past 15 years. He now wants to invest in several construction companies.

Which is more likely?

1. Peter will make money.

2. Peter will lose money.

Exercise 8

Sarah has been investing in the insurance industry for the past 15 years. She now wants to invest in agriculture.

Which is more likely?

1. Sarah will make money.

2. Sarah will lose money.

Exercise 9

Olivia has been a history teacher for 10 years.

Which skill is unlikely to be in her Circle of Competence?

1. Communication

2. Teaching

3. Algebra

4. Powerpoint

Exercise 10

Harry has been a geography teacher for 10 years. He wants to start a finance channel on YouTube.

Which is more likely?

1. Harry will attract an audience.

2. Harry won't attract an audience.

Exercise 11

You need more customers. You are looking to create ads on Facebook. You have never done it before.

Which is more likely?

1. You will succeed.

2. You will fail.

Exercise 12

You want your website to look better.

Which person should you hire for the task?

1. Ron, a web developer.

2. Sophia, a digital marketer.

3. Chris, a web designer.

4. Eve, a copywriter.

Exercise 13

Lucas wants to buy a house, renovate it and then sell it. He has done that 42 times.

Which is more likely?

1. Lucas will succeed.

2. Lucas will fail.

Exercise 14

Katie is a wedding planner. A family member wants her to plan the wedding.

Which is more likely?

1. The wedding will be good.

2. The wedding will be bad.

Exercise 15

George is a newspaper journalist. He wants to switch careers.

Which career below falls the most within his Circle of Competence

1. Financial manager

2. Programmer

3. Advertising copywriter

4. Illustrator

Answers

Exercise 1

The correct answer is option 2.

Your dad will operate in an area where he has no expertise.

Exercise 2

The correct answer is option 2.

Joe will operate in an area where he has no expertise.

Exercise 3

The correct answer is option 3.

Ghostwriting is a technical skill that falls under writing.

Exercise 4

The correct answer is option 2.

Daniel will operate in an area where he has no expertise.

Exercise 5

The correct answer is option 1.

Sophie will operate in an area where she has expertise.

Exercise 6

The correct order is 3, 2, 1, 4.

Coding comes first since Eric has been programming for 20 years.
SEO comes second since Eric has been working on websites.
Baking comes third since it’s unlikely that wizards exist.

Exercise 7

The correct answer is option 1.

Peter will operate in an area where he has expertise.

Exercise 8

The correct answer is option 2.

Sara will operate in an area where she has no expertise.

Exercise 9

The correct answer is option 3.

It’s unlikely that Olivia was able to develop algebraic skills while teaching history.

Exercise 10

The correct answer is option 2.

Harry will operate in an area where he has no expertise.

Exercise 11

The correct answer is option 2.

You will operate in an area where you have no expertise.

Exercise 12

The correct answer is option 3.

Chris the web designer has the right skills for the task—designing the layout, visual appearance, and usability of the website.

Exercise 13

The correct answer is option 1.

Lucas will operate in an area where he has expertise.

Exercise 14

The correct answer is option 1.

Katie will operate in an area where she has expertise.

Exercise 15

The correct answer is option 3.

Advertising copywriter requires similar skills.

Bonus

Warren Buffet explains the Circle of Competence.

An insightful message from one of our readers

I guess it is important to split your project into components and think about your competence in each of them separately.

For example, suppose I am a good software developer, and I want to create and sell a computer game. At first sight, this should be within my circle of competence. Like, maybe I usually develop applications, not games, but after learning a few extra things (e.g. how to do the animation), I should be ready.

However, there are things I am not competent at, which would also be necessary:

• painting graphics, composing music;

• designing a game that is fun;

• marketing.

So, the predictable outcome would be a game that is technically okay, but has ugly graphics, horrible or no music, is quite boring, and doesn't sell.

Which is a different prediction than the one I would have made at a higher level: "I am good at software development, of course, I am competent to develop a piece of software".

And of course, this is not a reason to give up but to find partners for the projects who have the missing skills.

Viliam

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