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  • Untangling Skill and Luck

    The outcomes for many activities in life — including sports, business, and investing — combine skill and luck. Most of us understand and accept this statement, but there are two good reasons why few of us understand the relative contributions of each.

    For almost two centuries, Spain has hosted an enormously popular Christmas lottery. Based on the payout, it is the biggest lottery in the world and nearly all Spaniards play. In the mid-1970s, a man sought a ticket that ended in 48. He found a ticket, bought it, and won the lottery. When asked why he was so intent on finding that number, he replied, “I dreamed of the number seven for seven nights. And seven times seven is 48.”

    The outcomes for many activities in life — including sports, business, and investing — combine skill and luck. Most of us understand and accept this statement, but there are two good reasons why few of us understand the relative contributions of each. The first reason is psychological. When we enjoy a good outcome due to luck, we are naturally inclined to chalk up our success to skill. Similarly, if we suffer an adverse outcome because of poor skill, we blame our bad luck. I recall an acquaintance who won big one Saturday night playing slot machines. The next week he solicited friends to build his bankroll, convinced he had devised a winning formula. Needless to say, Lady Fortuna stopped smiling and he returned his gains, along with the money of his credulous sponsors, to the house. We have psychological defense mechanisms that blur our view of the relative role of skill and luck.

    http://blogs.hbr.org/cs/2011/02/untangling_skill_and_luck.html

    Upstart: Business and Management for 29-40 Year Old Professionals

    Filed Under: Management

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