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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.
In Part 1, we’ll examine how people mistake randomness for skill and how rare events can influence success and failure.
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.
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.