The Success Equation

My top 10 highlights from the book: The Success Equation: Untangling Skill and Luck in Business, Sports and Investing by Michael Mauboussin

  1. Much of what we experience in life results from a combination of skill and luck. A basketball player’s shot before the final buzzer bounces out of the basket and his team loses the national championship. A pharmaceutical company develops a drug for hypertension that ends up as a blockbuster seller for erectile dysfunction. An investor earns a windfall when he buys the stock of a company shortly before it gets acquired at a premium. Different levels of skill and of good and bad luck are the realities that shape our lives. And yet we aren’t very good at distinguishing the two.
  2. If you take concrete steps toward attempting to measure those relative contributions, you will make better decisions than people who think improperly about those issues or who don’t think about them at all.
  3. When luck has little influence, a good process will always have a good outcome. When a measure of luck is involved, a good process will have a good outcome but only over time.
  4. When an activity is mostly skill, we need not worry much about the size of the sample unless the level of skill is changing quickly. For activities with a good dose of luck, skill is very difficult to detect with small samples. As the sample increases in size, the influence of skill becomes clearer.
  5. Sports are the easiest activities to analyze because the rules are relatively stable over time and there is lots of data. Other social processes, including business, have fewer rules and boundaries than sports and therefore tend to be more complex. Still, many of the same analytical methods are valid. Markets in general are the most difficult to analyze because prices are established through the interaction of a large number of individuals.
  6. Randomness and luck are related, but there is a useful distinction between the two. You can think of randomness as operating at the level of a system and luck operating at the level of the individual.
  7. There’s a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose.
  8. Skill shines through only if there are a sufficient number of decisions to weed out bad luck.
  9. Any activity that combines skill and luck will eventually revert to the mean. Slow reversion is consistent with activities dominated by skill, while rapid reversion comes from luck being the more dominant influence.
  10. In his book The Theory of Gambling and Statistical Logic, Richard Epstein, a game theorist trained in physics, notes that there is no way to assure that you’ll succeed if you participate in an activity that combines skill and luck. But he does say, “It is gratifying to rationalize that we would rather lose intelligently than win ignorantly. Luck may or may not smile on us, but if we stick to a good process for making decisions, then we can learn to accept the outcomes of our decisions with equanimity.”