The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing – Review


7.5 Understand Luck Better

luckskill

(luck-skill continuum)

I used to believe that everything is in my hand. I saw everything as a linear function where hard work and success are perfectly correlated:

Success = Sweat

It encouraged me to put efforts to prepare for literature exams, to learn swimming and to practice public speaking. Most of the time the equation worked. But as I started dealing with more complex issues in life the equation was falling apart. At times I was defeated even with significant efforts and other times I won even though I know didn’t put that much effort. Much more than what I would like to acknowledge, there are things simply not in my hand. Much like how Mr. Mauboussin, the author, credited his first career opportunities to recognizing a waste bin.

I learnt to call it luck.

Sometimes it works in my favour and other times it works against me. There is really nothing I can do about it. In the example given in the book, an exam which tests everything taught has less element of luck than an exam tests only 80% of what was taught. Mr. Mauboussin has proposed applicable models to categorize patterns how skill and luck are interwoven. Using simple language, he demonstrated how a world of luck and skill would behave. Then he varied the degree of luck and skill to simulate patterns that are similar to real world activities such as investing, baseball games and gambling. Then accordingly, he placed various activities on the luck-skill continuum. For example, tennis is a game less susceptible to luck than baseball.

Then he carefully divided activities further into four squares. Activities in a stable environment can be predicted by mathematical models whereas activities in a dynamic environment cannot. It is a common mistake that people apply logics derived in a stable environment where skill is dominant to a dynamic environment where luck is dominant. The book categorically challenged some orthodoxy, intuitive misconceptions. In the example from book, the traditional financial performance indicators such as sale growth and EBIT tell little how the company would perform in the next financial year. In a highly competitive market where the skill gap among participants is negligible, mean reversion effect is very powerful.

The book is another reminder to acknowledge the cognitive traps inherent built in our thinking process. The mind can be easily deceived by what it sees, or commonly referred as the availability trap. Although statistical thinking, which broadens the prospective, in theory provides better insight to unravel the complex world, immaculate discipline to engage rational thinking would be one challenge and how to appeal to others would be another. Nonetheless, it is a good book to learn about cognitive heuristics and a better way to understand and deal with the elusive luck.

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