- Luck, randonness, probability, belief, conjection, theory, forecast, lucky idiot, survivorship bias, volatility, noise, induction.
- Skills, non-randomness, certainty, knowledge, certitude, reality, prophecy, skilled investor, market outperformance, returns, signal, deduction.
Wednesday, October 11, 2006
Luck versus skill
This subject may be a little controversial but yet, it is something that is worth to be given a second thought. In everything people do, it is important to distinguish if the factor of success is attributed to luck or to skill. If you have read my earlier article on "Being fooled by randomness", you will perhaps have a slightly better understanding.
At times, we perceive luck-disguised as non-luck (that is, skills) and more generally, randomness-disguised and perceived it as non-randomness.
Consider the words on the first and second set of words of the following.
At many times, the first set is mistaken for the second set. We should be more concerned with mistaking the first set for the second set more than the opposite case. You may wonder why the opposite case might not deserve more attention, that is, the cases where non-randomness is mistaken for randomness. The answer is we need to take into account the cost of mistakes; mistaking the second set for the first set is not as costly as in the opposite direction, although it is still an error. Some people believe bad information is worst than no information.
I believe there is an area in which the habit of mistaking luck for skill is most conspicuous, and that is in the world of markets, finance, investments or business. This is an area in which it causes human the greatest confusion and destruction. For instance, we often have the mistaken impression that a strategy is an excellent strategy, or an entrepreneur is endowed with "vision", or a trader is a talented trader, only to realize 99.9% of their past performance is attributable to chance, and chance alone. Ask a profitable investor to explain the reasons for his success; he will offers some deep reasons or ideas of the results. Frequently, these delusions are intentional and deserve to bear the name "Charlatans or phonies."
If there is a cause to this confusion in distinguishing the first set from the second set, it is our inability to think critically and without emotions - at many times, we like to paint a picture so rosy to drum up the positivity to a level to deceive both ourselves and others so that we can feel good for as long as it lasts. Conjectures are many times taken as truth. It is human nature.
In most things we do, subconsciously, there is a fierce fight between the brain (not being fooled by randomness) and the emotion (completely risking being fooled by randomness). To subdue this emotional randomness, the best method is not by rationalizing it, it is to go around it.
There is no clear-cut solution to seperate the truth from the emotional conjectures. The ones who can enlighten us on some of these ruses are those who have walked in front of us and are wise enough to discover them and honest enough to share.
While writing, up to now, this is something that continues to fool me at times, though not as often. But it is something one should be aware of, in order to minimize getting fooled by luck.