How do you know if your successes are a result of skill or luck? That’s the question investment strategist Michael J. Mauboussin explores in his book The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing. I recently read an interview where Wharton management professor Adam Grant discusses with Mauboussin the paradox of skill, the conditions for luck, and how to avoid that stickler, overconfidence.
In a nutshell, Mauboussin’s “paradox of skill” sets forth the notion that in activities where skill and luck define outcomes, luck becomes more important in determining the outcome as skill improves. Thus, the paradox: more skill requires more luck.
How might that apply to the business world? Mauboussin says in a highly competitive marketplace, you need to differentiate yourself by using an unusual tactic in order to succeed. For example, he points to David vs. Goliath where, rather than match Goliath with armor, David relied on a unique skill, his slingshot, to win the battle. Similar to the flank strategy in warfare or a trick play in football, Mauboussin says relying on an “unusual strategy or disruptive innovation” may improve your luck.
He also makes the interesting point that while luck cannot be improved, it can be managed. For example, he suggests that when you are the stronger player, you want to simplify the game. And, when you’re the underdog, you want to complicate it.
Another thought that has applications for the business and investment world is his suggestion on how to guard against the harmful trait of overconfidence. Rather than make decisions from the perspective that we have superior information and intelligence, Mauboussin suggests looking at the problem “from the outside and how other people have fared and what happened to them rather than what happened to me.” Presumably the upshot would be a decision that was not infused with the incorrect notion that our information and insight was better than everyone else’s. He also suggests when looking at a problem, that we consider whether the environment is stable or unstable, as this could “determine how you think about solving it and what techniques you should use.”