This article is an excerpt from the Shortform book guide to "Fooled By Randomness" by Nassim Nicholas Taleb. Shortform has the world's best summaries and analyses of books you should be reading.
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What role does luck play in success? Do you tend to attribute your own successes to luck or effort?
People often overestimate the influence of effort in success. Though hard work, skill, and intelligence are often necessary first steps toward success, they rarely account for runaway success, which is far more often due to luck—a positive rare event plus a lack of negative rare events.
In today’s article, we’ll talk about luck and success—how huge of a role luck plays in bestowing success and why we often mistake it for skill.
What Is the Role of Luck in Success?
When we talk about luck, we are talking about randomness—more specifically, “rare events”: infrequent and usually unpredictable events that bring with them huge payoffs or devastating wipeouts. Rare events have outsized and uneven effects on achievement, occasionally bestowing success on less competent people and at other times taking it away from those who’ve had long winning streaks.
This is more true in industries that rely heavily on chance, such as investing, than it is for professions like carpentry or medicine that are built more on perseverance and skill. Often, though, people don’t recognize how fundamentally different chance-based professions and skill-driven professions are in how they each produce success. This misunderstanding, and the tendency to credit success to skill instead of luck, can lead people to make poor decisions.
We Often Mistake Luck for Skill
When we see someone who’s had incredible success, we often credit that success to a combination of skill, hard work, intelligence, and perhaps some other mysterious traits that create millionaires. However, skill and hard work will generally only earn a person moderate success. Wild success, the kind that comes with millions of dollars and lasting fame, is usually due to luck: a positive rare event plus a lack of negative rare events.
This is not to say that luck is the only ingredient in a successful working life. To take advantage of luck, you must have a base of preparation that includes skill, experience, and presentation. Showing up on time, wearing appropriate clothing, and working hard are all necessary first steps. But this doesn’t explain why some people find runaway career success but others don’t, any more than the process of buying a lottery ticket, while a necessary step, can’t explain why one person wins over another.
When people mix up luck with skill, they are confusing what is necessary with what is causal. It might be necessary for you to wear a clean shirt to work, but that didn’t cause you to handsomely profit off that last trade. Millionaires might necessarily work hard and take risks; this does not mean all hardworking risk-takers are millionaires.
History is littered with examples that illustrate this. Though Julius Caesar was surely intelligent, noble, and brave, so were many others who never rose to his heights. His personal characteristics were necessary for his achievements but are not enough to explain his lasting fame, which was more likely due to him repeatedly being in the right place at the right time.
Survivorship Bias Blinds Us to What Might Have Happened
One reason people attribute luck to skill is the “survivorship bias.” We typically see only the people who have “survived,” or thrived in any given situation, and we extrapolate lessons from their survival: mainly, that wild success can be reasonably expected from this particular industry or venture. We fall prey to the survivorship bias partly because the wildly successful examples are simply more visible; the failures tend to slink away into obscurity and remain unnoticed. When we don’t see them, we forget they’re possible.
This bias causes people to see examples of enormous success as representative of the kind of success any person can expect in that industry. For example, people see a fabulously wealthy stockbroker and think, “Trading is very profitable.” Or they see a bestselling author and think, “Writing is a great way to get rich.”
However, to accurately evaluate the potential for success in any venture, you must consider not only the observable results but also the invisible alternatives: the possible failures had the person’s luck been worse and success not been achieved.
For example, you can’t properly determine the likelihood of getting rich as a trader without accounting for the many people who have attempted it and failed. You can’t judge your chances of getting rich through writing without considering all those who couldn’t find a publisher or whose published book garnered few sales.
When you think about these invisible failures, you are thinking through “alternative histories” or “possible worlds”: other ways your path might have played out if your luck had been different. For instance, what might have happened if the market hadn’t jumped 500 points that morning? What if that large bet you made on that particular stock hadn’t worked out?
The History of Possible Worlds Thinking
The idea of possible worlds has been promoted in various branches of thought.
In philosophy, possible-world theories consider whether or not God produced an infinite number of possible worlds and then followed through on just one.
In physics, a many-world theory of quantum mechanics posits that the universe branches out, tree-like, at every change; we are living in just one of these many worlds.
In economics, the “state-space” method looks at economic uncertainty by examining the “what-ifs” that might happen under different markets or world conditions.
In mathematics, a field often applied to the study of investing, so-called Monte Carlo methods of thinking help produce a hypothetical set of alternative paths: successions of events that might have happened after an initial, defined event. Mathematicians even have a computer program called a Monte Carlo generator that produces enormous sets of these possible paths, allowing the user to examine thousands of possible outcomes given a certain set of conditions. These simulations have been used in everything from war preparations to financial markets to help policymakers and businesspeople calculate odds without the aid of complicated mathematical formulas.
Of course, you don’t need an actual Monte Carlo generator to think about possible worlds. When presented with a choice, imagine the possible outcomes and then go a few steps further to imagine the possibilities that might arise from each outcome. In this way, you can start to consciously see that the outcome you’re hoping for is only one of many possible outcomes.
It’s Hard to Spot Possible Worlds in Real Life
It’s easy to spot the random nature of the fortune produced by a hypothetical game of, say, Russian roulette, in which you are offered fifty million dollars to fire a gun loaded with one bullet and five empty chambers at your own head. These conditions are simple, limited, well-defined, and unarguably random.
It’s less easy to spot randomness in professions that hew closer to a mainstream expectation of income and that have fewer clearly-defined parameters, like trading. But the random nature of these professions is equally as influential. This has been illustrated by studies that show stocks chosen by throwing darts at a list are as likely to succeed as those chosen by seasoned professionals.
The difficulty of recognizing random influences means it’s even more important to consciously try to. Because the fatal “bullet” is more infrequent in the real world, and because its risks are more vague and harder to spot, people end up playing Russian roulette without consciously realizing it—that is, they end up playing a game based on luck while thinking it’s based on skill. Then, when the beneficiaries of this random luck become role models, others are lured into the game thinking their odds of success are greater than they actually are.
Get into the habit of thinking about possible worlds and alternate paths and you will gain the ability to see possibilities every time you are presented with a choice. This will help you “learn from the future” so you can better assess risk, and more readily resist the pull of the roulette wheel.
Rare Events Have an Outsized Influence
When we speak of luck and success, we are talking specifically about rare events and their outsized influences on any particular path. A person can be vaulted to great success if she catches a positive rare event, such as an unlikely and highly profitable trade. Conversely, she can spend every day making winning bets but can lose everything in a few minutes when a rare bad bet wipes out all her winnings up to that point.
(When a trader makes a trade that wipes out her capital and results in her getting fired or leaving investing altogether, it is called “blowing up.” A blow up is more than just losing money; it is losing more than the trader was expecting or was prepared for, and is usually enough to end her career. Most traders blow up at some point. In fact, the 10-year survival rate for traders is under 10 percent.)
History is littered with rare events, but it’s impossible to know exactly when and where they are going to hit. This is why people tend to ignore the probability of rare events; it is hard to plan for something you can’t predict, and it’s hard to understand something that doesn’t follow the rules.
However, when you don’t understand how rare events work and how significant their influence is, you are unable to properly assess risk and opportunities, or to clearly see what’s shaping the world around you. Rare events and randomness:
- Shape track records
- Allow less qualified competitors to win
- Shape the evolution of businesses
- Guarantee that wild success built on luck is not sustainable
These ideas are explored further below.
Randomness Shapes Track Records
A solid track record does not indicate future success in a luck-based profession like investing. Because of the nature of randomness and rare events, given a large starting set of people, a certain percentage will end up wildly fortunate and thus have an excellent track record, regardless of their skill or competence.
For example, imagine we run a Monte Carlo simulation in which 10,000 traders each have a 50 percent chance of making money or losing money every year. Assume that if a trader loses money, she’s out of the game. After the first year, there will be 5,000 traders left. After five years, there’ll be just over 300 traders left. The continued success of these 300 traders might be due entirely to luck, but in the real world, each of these traders would be lauded for her skill.
Thus, to properly judge the value of someone’s track record, you need to know the size of the initial group she came from. Out of a large starting set, at least some people will dodge negative rare events for longer and will end up randomly successful, but from a small starting set, it is more likely that everyone will succumb to bad luck sooner. Therefore, if a person is successful coming from a small group, her success is more likely due to skill than luck. To illustrate, if we run the Monte Carlo simulation above with a group of only 10 traders, all of them will likely be wiped out within three or four years. Thus, if one of those people is successful after five or more years, it more likely indicates skill than luck.
To press the point further, let’s examine a scam that takes advantage of the numbers in the example above to manufacture a winning track record. Imagine someone sends letters to 10,000 randomly selected people in January. Half of these letters predict the market will rise in the next month and half predict it will decrease. At the end of the month, 5,000 letters have correctly predicted the market. This person then sends letters to just those 5,000 that were correct—again, with half these new letters predicting an increase in the next month and half predicting a decrease.
At the end of each month, she repeats: sending new letters to only the people who’d received the correct predictions. By June she’s left with only about 300 people, but these 300 are likely to be amazed at her powers of prediction, not realizing the randomness responsible for her winning track record. They may, therefore, be more likely to make a poor decision—in this case, they might entrust her with their money.
Randomness Allows Less Qualified Competitors to Win
Because of the nature of randomness, life can be unfair: The most capable companies and the most skilled people are not the always ones who achieve success. For example, consider if we ran the simulation above so that each trader only had a 45 percent chance of making money in a year. Even though these traders would be slightly incompetent (as evidenced by their greater-than-even chances of loss), at the end of five years we would still have almost 200 traders still in the game, each of whom would be celebrated.
This possibility of luck favoring the less-skilled is compounded by the fact that in the real world, unlike in hypothetical situations, early success helps determine subsequent success. In a hypothetical situation, if you were to flip a coin, your chances of guessing heads or tails would be the same for each successive flip. However, the real world often functions so that if you win an early random advantage, you are better placed to win subsequent random advantages, and vice versa: Early random losses lead to subsequent random losses.
We see this when the paths of two companies, both well-qualified, diverge because one had early chance meetings with key executives or unexpected early product orders. The success of Microsoft is an example of this. Though Bill Gates was undeniably hard-working and intelligent, so were many of his rivals, and few would argue that his software took off because it was the best available. It is more likely that he got an early advantage through chance events and early positive feedback.
This is called a “path-dependent outcome” and it explains why we can see a few astonishing successes but many more failures. The QWERTY keyboard is another illustration of this effect. It did not become the standard (and thus a success) because it was the most efficient layout of letters; in fact, it was developed purposefully to slow typists down with the difficulty of its design. However, it was the initial design introduced on a commercial scale, and once people got used to it, it became impossible to change—despite many attempts—simply because it had been the first, not because it was the best.
Randomness Shapes Evolution
People also misunderstand the way evolution works in either the natural or business worlds, believing that it steadily and irreversibly improves both animals and companies little by little. However, this belief ignores the way that rare events affect evolution.
Darwinian evolution describes the tendency of a species overall to survive in the long-run. Often, though, in short-term chunks, the path is not smooth or linear. Sometimes animals evolve unhelpful genetic mutations, which might not harm them in the short-term—and may even help them—but might weaken them in the long-term. Such mutations will persist as long as the animals don’t encounter a rare event that the mutation makes them unable to handle. As soon as the animals encounter this kind of event, though, their unhelpful traits will cause them to fail. In this way, after a few generations, this “genetic noise” typically gets filtered out.
In the same way, behaviors and strategies that benefit traders under certain lucky conditions might wipe them out under others, and someone who does well when markets behave predictably may not do well when they don’t. At any given time in the market, the most successful traders are those whose qualities or strategies best fit the current environment. For example, traders who tend to buy during dips do well when those dips later turn into rallies, but that same strategy will sink them if the market continues to plummet. In a real-life example, traders who bought foreign currencies in the 1980s when the US dollar was overpriced went bust; traders who did the same thing a few years later, when the dollar was priced lower, got rich.
In sum, short-term survival can be often attributed to lucky conditions but long-term survival does not favor those who depend on luck for their success.
(Shortform note: For more discussion on our misconceptions of evolution, read our summary of The Selfish Gene.)
Randomness Guarantees That Wild Success Is Not Sustainable
The idea that success built on luck is short-term brings us to our next point: Success built on luck is not worth the risk. Luck-based success will always disappear at some point, and when that happens, a person can lose everything she’s won up to that point. In the end, it doesn’t matter how frequently a bet succeeds if its costs of failure are too high to bear. In the long run, it is better to have smaller success and protect yourself against large failures, than to have large success but be vulnerable to even bigger failures that will take it all away.
For example, in that hypothetical game of Russian roulette described above, there are six possible outcomes; in five of them, you emerge fabulously rich. But in one, you die. Though the likelihood of success is greater, the cost of failure is too high to make this a wise way to make money. Similarly, if you are making bets that earn you money every time they go through but leave you vulnerable to a loss that wipes you out, you will not have longevity. Sooner or later, the lesser-likely event will happen; at that time, all of your previous wins count for nothing.
In contrast, moderate success built without the aid of luck is less vulnerable to the whims of randomness. While the rewards of this success may be lesser, the stability it provides is greater. For example, if you are building success with persistence and intelligence in a field like, say, cardiology, then in none of your possible worlds might you end up fabulously rich, but in most of them you’ll end up at least moderately successful. In contrast, traders who make bad trades will blow up. Waiters who win the lottery will not likely win it again. Over the long run, success tends to be determined by a person’s inner qualities rather than long streaks of good fortune.
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- The outsized role luck plays in success
- How we’re fooled by randomness in many aspects of our lives
- How we can accommodate randomness in our lives once we’re aware of it