Have you ever wondered what percentage of your success is due to your acquired competencies (skills) and how much is due to good fortune (luck)?
From excelling in sporting competitions to winning at work, we’re frequently undecided about which of the two ingredients ends up being decisive. Most of the time, skill and luck are entangled and overlapping. As a result, few of us are adept at accurately distinguishing between the two. So, imagine what we could accomplish if we were able to differentiate them, examine them, and use this knowledge to make better decisions?
The Success Equation1, a book authored by Michael J. Mauboussin2, aims to help untangle the intricacies of these skill/luck threads and, in doing so, build a conceptual lens through which to analyze the relative importance of each.
Mr Mauboussin is the former managing director and head of Global Financial Strategies at Credit Suisse. In that capacity, he advised clients on valuation and portfolio positioning, capital markets theory, and decision-making.
Losing on purpose
According to The Success Equation, there is a quick and easy way to test whether an activity involves skill. All you must do is ask whether you can lose on purpose. Skill is the ability to deploy knowledge and aptitude in execution. Put another way, when we know how to do something – when the moment comes – we can do it.
Luck is different. It can be responsible for good or bad outcomes, and – depending on the circumstances – when luck is involved, it’s reasonable to expect that something else could have happened.
When skills are predominant in a field of endeavour, the best course of action is to engage in deliberate practice3 – defined by the idea of learning not through mindless repetition but through focused attention with the specific goal of improving performance – supported by feedback and coaching.
When luck is predominant, Mr Mauboussin advises us not to worry over results, as we have little or no control over them. Instead, we should focus on our process to reach long-term success.
Skill and luck operate on a continuum. Chess takes skill to play well. Gambling involves a significant degree of luck. Investing, according to Mr Mauboussin, is somewhere in between – which is why portfolio diversification is so critical to long-term investment success.
For the rest of the things in life, we are caught between the two extremes. How we make decisions depends on where we are on that continuum.
Among the crucial concepts in The Success Equation, the following two are the most helpful and insightful:
1. Favourites should simplify the game
If we have superior resources, we should try to focus our battles in fewer fields than if we are the underdog. Extreme complexity in any undertaking tends to increase the role of luck, which gives the underdog an unearned competitive advantage, penalizing the stronger player as a result.
2. Fluid vs crystallized mind
Cognitive research shows that our fluid mind – the part of our brain useful for creative decisions when facing problems that we have not encountered before – decreases with age at an accelerating rate. The crystallized mind – our ability to develop mental models designed to solve problems we have seen before – tends to increase well into old age.
Turning skill into success
While we can consistently deliver top performance based on skills, we still need an element of luck to help us maintain sustained success. Here are four ingredients that Mr Mauboussin says can help:
- A high IQ.
- A fluid mind that allows us to think creatively about opportunities using unique, differentiated framing.
- A crystallized mind that correctly identifies patterns and uses well-developed mental models to make decisions with available information.
- Clutch instincts that enable us to make difficult decisions even under pressure when presented with new, or adverse information.
The jury is out on whether movie producer Samuel Goldwyn or U.S. president Thomas Jefferson was originally responsible for the memorable “The harder I work, the luckier I get” aphorism. But the underlying truth of the insight has considerable appeal.
Discipline is our ultimate ally, concludes Mr. Mauboussin, a conviction we at TWM Group believe in above all.