A friend told me recently that he’d started implementing checklists in his organization. Afterward, he noticed, people seemed a lot more confident in their decisions. On the surface, that would seem to be a good thing—but there are some times when confidence can go awry.
When we’re facing a problem, we often start running down a checklist for potential solutions. Checklists serve an important purpose: they help us make sure that we understand the basics of a situation, especially in the face of complexity, and avoid obvious sources of error. Pilots and doctors, for example, use checklists to great effect.
But as Warren Buffett has said, “A checklist is no substitute for thinking.” In a complex domain, checklists can also encourage us to overestimate our competence. Knowing your “circle of competence”—the areas in which you are a true expert—is thus incredibly important. You also have to know to what extent you understand the variables that govern the problem. And you have to be able to understand the predictability of those variables.
I recently had the opportunity to talk with Swedish investor Peter Bevelin the problem of overconfidence—and how to prevent ourselves from falling into the trap. He explained that there are four scenarios here that you might confront. Let’s walk through each situation.
#1: You’re inside your circle of competence and don’t know it
I’m not sure how you ended up here.
#2: You’re inside your circle of competence and know it
This is the best scenario. Your focus in this circumstance should be on understanding differences and similarities between this particular situation and other problems you’ve faced like it in the past.
I find asking two questions to be helpful. First, are the variables are still as predictable as you thought they were? And, second, what information would cause you to change your mind?
#3: You’re outside your circle of competence and don’t know it
In the long run you’re screwed, as you repeat uninformed decisions over and over. In the short term, you might get lucky. Good luck.
#4: You’re outside your circle of competence and know it
This is the second-best scenario, although most people don’t see it that way. Knowing you’re making a decision outside of your domain of expertise allows you to approach it differently and nudges you to be more open to feedback and new information.
There are two approaches that may be helpful when you find yourself in this scenario. First, ask someone who is an expert in that domain to walk you through how they see the situation. Learning how they think about the situation will not only give you a better answer than simply asking for advice, it will help you learn from their thought process.
Second, if you’re pressed for time or can’t find an expert, use the principle of inversion to eliminate outcomes you don’t want. Figure out the two to three worst-case outcomes and what steps you would have to take to make sure they are avoided. Avoiding bad outcomes increases the odds of getting a good one.
While we can’t always make decisions in our circle of competence, we can develop a better understanding of how the world works and use that knowledge to make better decisions over time. It’s a little bit of extra work up front, of course. But the investment pays off when you consider one of the biggest time wasters in modern organizations is attempting to improve poor initial decisions.