Definition

Individuals gain knowledge by studying or experiencing the world. Knowing where your competencies are and where they are not is crucial to understanding what problems you can solve and which ones you’ll need to ask for help.

Why Use It

By identifying your areas of expertise, one can determine where they have an advantage.

When to Use It

Working within a circle of competence gives you an unfair advantage with access to more information, which allows you to narrow your options and ultimately make better decisions.

How to Use It

Defining what you know and what you don’t know is the first step. Operating in that circle of competence is the second step. Recognizing your limitations is the third and most important step.

How to Misuse It

Sometimes pride, negligence, or carelessness can cause folks to overstretch their circle of competence — that’s where you’ll usually get into trouble.

Going up against those with more experience can be a losing proposition. Be honest with yourself. Understanding your weaknesses is a strength.

Next Step

Grow your body of knowledge and gain more experience in fields that interest you, but remember that blunders happen when you’re in unfamiliar territory.

Where it Came From

The concept was formed by Warren Buffett and Charlie Munger to explain why someone should limit their financial investments if they don’t have expertise in that area.