Boundary of Lines and Gradients

In The 7 Habits of Highly Effective People, Stephen Covey introduces the notion that things we encounter in life may be classified as irrelevant or relevant to us (whether they are in our circle of concern), and then of the things that are relevant, whether they are things we can influence (hence circle of influence).

This idea is introduced in the context of arguing that highly effective people are proactive. The book claims that there’s a risk that one spends too much time focusing on things within one’s circle of concern, but external to one’s circle of influence. By definition, these can’t be meaningfully changed by one’s actions, so one logically should not focus on these; yet, there is a tendency for one to index too heavily on these, perhaps because they are worrying to look at.

I remember some concern over my work visa application process when I was still studying at Imperial; at the time, the UK Migration Advisory Committee was actively reviewing the Tier 2 scheme with a specific focus on post-study work. Obviously, that was within my circle of concern, but was out of my circle of influence. I was quite concerned about it then, and spent a good amount of time researching how Tier 2 visas looked like and what changes might have occurred.

I also took positive action to hedge these risks (which was within my circle of influence). This included investigating opportunities elsewhere, restricting my internships to places that were willing and able to sponsor Tier 2 visas, and trying to be “so good they can’t ignore you”. Looking back, I think the hedging was valuable; poring over visa rules was less so.

So far, so good. However, there is some difficulty in applying this idea. Two challenges I’ve thought about recently are accurately identifying the boundaries of one’s circle of influence, as well as figuring out when one should exercise one’s ability to influence things in one’s circle of influence.

In terms of identifying boundaries, one may incorrectly identify things as within one’s circle of influence, owing to overconfidence or excessive optimism – a classical example being what other people, especially other people we don’t know choose to do. The inverse would be identifying things as outside from fear; I’ve done this before in terms of some aspects of how I’d been investing my free time (in particular, a commitment to over-studying).

Errors in both directions may also stem from ignorance; for example, one may (correctly) think that the spot GBPUSD exchange rate is mostly not in one’s circle of influence, and then extend that to say that the number of pounds one must pay for a known upcoming dollar expense is out of one’s circle of influence (wrong; forward contracts and other hedging methods exist).

Some authors make further distinction between things one can influence and things one can control, which usually implies personal ability to decide the outcome (for example, one can control one’s own decisions, but can probably only influence another person’s behaviour). I find this a fairly useful distinction to make.

We then move to figuring out if things within our circle of influence are actionable. They can be, but aren’t always. For example, I’ve thought about how to insulate my portfolio from the storms of Brexit and the recent market turbulence. On one hand, my asset allocation is clearly within my circle of influence. I can sell everything and go to cash (or, if one’s worried about the pound, to the US dollar or yen). I’d say it’s even stronger than that – it’s something I can directly control in that I know I am able to execute the relevant transactions if I want to.

Yet, I don’t necessarily know how changes in my asset allocation will affect the returns I will get and the risk I’ll be taking on. I can make some estimates based on past distributions, but those will suppose that at least to some extent past performance is indicative of future returns; there might be ‘black swans’ which can mess with this and by definition are not foreseeable (and thus outside of my circle of influence). In a sense, I know I can change things, but I don’t know as well what impacts my changes will actually have; there is also a cost to implementing changes (both in terms of tax and dealing fees). Making repeated portfolio changes that individually make sense if one thinks one can significantly influence returns or risk could turn out being very costly.

A variant of this is that we may loses sight of actions we should probably take that contribute towards progress on a goal in our circle of concern, even if we (correctly) identify it as mostly outside our circle of influence. This might include the broader state of the economy, environment or public health – it’s probably reasonable to think of these as not things we can directly influence, but that shouldn’t be a reason to ignore them altogether. These behaviours should be accounted for by related things within our circle of influence, possibly at a finer resolution (e.g. “I will continue to work, earn, invest and spend” because I am concerned about my own personal economy and living standards), but they might not necessarily be.

I agree that we should focus our energies on things that we can influence; that said, we need to be careful to identify these correctly (or for things that are large, identify what we can influence), and also to be aware that being able to influence something doesn’t mean we should.

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