The Success Equation: Untangling skill and luck in business, sports and investing
Mauboussin’s own career was launched due to luck. All six people on the selection panel at his investment bank had rejected him, but in his final 10 minute interview with the top decision maker, he spotted a Washington Redskins football team bin and an instant connection was made. While it was his skill that kept him in his job, it was luck that opened the door.
Much of what we experience in life results from a combination of skill and luck…And yet we aren’t very good at distinguishing between the two.”
Michael J Mauboussin
His goal is for readers to better understand how much skill or luck – and usually a combination of both – contribute to results, and so helping people make better predictions and achieve success in the future. The book is divided into three parts. Firstly, Mauboussin defines skill and luck, and helps us understand why it is so difficult to interpret statistical results accurately, and then develops the idea of the luck skill continuum and how to use it as a framework for decision making. Activities like investment are largely due to luck, while skill in sport can be learnt through dedicated practice. In the second part of the book, he delves into the continuum and other tools to analyse how much influence luck or skill had in a result, how skills will peak and then tail off, and how to identify a useful or useless statistic. Finally, he offers suggestions about putting the theories into practice, how to cope with luck – good or bad – and an in-depth explanation of reversion to the mean and how most people misinterpret this.
Interesting examples include:
- How people often ignore the underlying statistics, in preference for specific examples. A doctor is able to persuade his patients to undergo treatment that only has a 50% success rate – the base rate – by telling them that the last patient who had undergone the treatment was doing really well. For most people, the story of the success swamps the statistic – they should be assessing the base rate, not just the result of one case
- The virtually unheard story of Gary Kildall, one of the greatest computer programmers of all time who is credited with writing the software that started the PC revolution. Kildall died in 1994, after failing to capitalise on an offer by IBM to include his software with their computers. So it was Bill Gates’ Microsoft operating system that was offered at the most competitive price, with no exclusive license, that made Microsoft the success it is today. While Gates has admitted that luck and timing played an immense role in his success, the way he capitalised on the opportunity is legendary
- Most people think that luck evens out over time, and while that may be true in the grand scheme of things, it doesn’t hold for any individual. Research has shown that students who graduate from college at times of relative prosperity find it easier to get jobs, and enjoy higher pay than students who graduate during a recession, an effect which has been seen to last for fifteen years post graduation
- People can attain an acceptable level of skill in day-to-day activities like driving a car or playing a sport after about fifty hours of training and practice. Once you reach a certain point, most people are perfectly happy to stay there, and additional experience will not lead to improved results. What distinguishes elite performers is how they advance through deliberate practice – which involves hours of concentrated and dedicated repetition – and timely and accurate feedback from a coach in order to detect and correct errors
- Sample size is key – a common mistake is to read more into an outcome than is justified. One example is the drive by policy makers to attribute academic success to small schools, backed by billions of dollars of investment. But the data shows that small schools were over-represented in the sample, and in fact large schools generally score better because they have more resources to offer a richer curriculum. If you have an activity where the results are nearly all skill, you don’t need a large sample to draw reasonable conclusions – a world class sprinter will beat an amateur every time. But in a game of luck, like poker, you need a large sample size to correctly assess the outcome over time
While the terms standard deviation or reversion to the mean may cause some to shudder with memories of school maths lessons, perhaps a small dose of dedicated practice to improve our statistical skills, and a little bit of luck, may just lead to that elusive success.
About the author Michael J. Mauboussin is a Managing Director and Head of Global Financial Strategies at Credit Suisse. He is the author of three books, including More Than You Know: Finding Financial Wisdom in Unconventional Places, named in the 100 Best Business Books of All Time by 800-CEO-Read. Michael is an adjunct professor of finance at Columbia Business School and is chairman of the board of trustees of the Santa Fe Institute.
“With this book, Mauboussin takes an important step in making a case for the role of statistical analysis in decision-making in various contexts, ranging from CEO compensation to child rearing to college rankings and even picking the next musical superstars.” Business World magazine
“… for investors and business executives wishing to minimise the risk of bad luck, this is a book worth reading.” Financial Times
“There is a lot of thought-provoking stuff in the book, for sports fans as well as investors.” The Economist
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Author: Michael J Mauboussin