It’s a rather well-documented fact that when things go well for us, we tend to attribute outcomes to our own skill and merit, but when the curve ball breaks badly, well, that’s just bad luck. Michael Mauboussin’s recent book The Success Equation takes a look at the role of luck and skill in a variety of contexts, including sports and investing, and he concludes that good luck plays far more prominent a role in many of the outcomes we care deeply about than most of us are willing to countenance.
Take, for instance, “success studies.” They’re among the best- selling business books around: In Search of Excellence and Good to Great practically define the genre, and they just keep on coming. But there is an unspoken assumption underneath all such studies that the performance being studied is unambiguously a function of company-specific features (that is, skill) and not more likely attributable to system-level variation—more commonly known as “luck.”
To tackle this problem, Mumtaz Ahmed (a principal in Deloitte Consulting LLP), Andrew Henderson at the University of Texas at Austin, and I have looked at more than 25,000 companies over 45 years and found fewer than 350 with performance profiles distinguishable from the rough and tumble of randomness. One particularly compelling fact emerged: The level of variation in the underlying system is high enough that it takes at least 10 years in the top 10 percent of the population for a company to rise above the noise and distinguish itself.
Most case studies of successful companies don’t even ask whether they are studying luck or skill, never mind hazarding an answer. In addition, many such studies look at 10 years or less of data, which means the odds of picking a “better than lucky” company by luck alone is close to zero. Finally, with so few companies statistically delivering better-than-lucky performance, the most charitable implication I can draw is that most success studies usually are not studying firms with demonstrably exceptional performance.
What is it that makes luck so dominant in the determination of outcomes? Almost every system of even moderate complexity is subject to random variation. Because of this, in any system with a large number of players engaged in repeated attempts to win, some will pile up seemingly remarkable streaks simply as a consequence of that randomness. And the greater the randomness, the longer and hence more seemingly astonishing a given player’s winning streak might seem. MIT’s Rebecca Henderson illustrates this point as follows: “I begin my course in strategic management by asking all the students in the room to stand up. I then ask each of them to toss a small coin. If the toss comes up tails, they are to sit down, but if it comes up heads, they are to remain standing. Since there are around 70 students in the class, after six or seven rounds there is only one student left standing. With the appropriate theatrics, I approach the student and say, ‘How did you do that? Seven heads in a row! Can I interview you in Fortune? Is it the T-shirt? Is it the flick of the wrist? Can I write a case study about you?’
She’s actually killing two birds with one coin. First, this shows how poorly human intuition copes with randomness: We see remarkableness in what is actually entirely mundane and predictable. Second, she skewers our collective penchant for explaining what warrants no explanation. Human beings need stories to make sense of the world, and we concoct whatever we must to feed that addiction.
The prominence of luck, and our singular ability to ignore it, is downright dangerous. Much of what passes for advice on how to succeed appears to be based on an examination of randomness. That advice, if followed, amounts to tinkering with complex systems we only partially understand, and that almost always increases the unpredictability of the system itself. In short, advice intended to reduce our reliance on luck might actually increase its impact!
The overriding role of luck means that we must be humble in making claims of our own merit, and circumspect when taking advice based on the study of alleged greatness.