The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

Wondering what makes it so hard to make good decisions? Reading or really seriously studying Mauboussin's new book (http://www.amazon.com/The-Success-Equation-Untangling-Investing/dp/1422184234) is a fascinating education in how the brain misperceives the environment in predictable ways.Mauboussin identifies the ways we can be tricked by short cut thinking and rules of thumb decision-making. He even makes it seem possible, before breakfast, to understand a bit about correlations and decision-making linkages, statistical thinking and reversion to the mean. By carefully explaining the difference between luck and skill and how we often mistake one for the other, Mauboussin helps us enhance our ability to perceive the world.For example, it makes sense but still requires untangling luck and skill to acknowledge that luck plays a significant role in which team wins the Stanley Cup or the Super Bowl. Once skill is evenly matched among the participants, there is some room for luck to make a difference. There can be interplay between skill and luck when one is very disciplined in acquiring skill. Often people mix up luck and skill as in a coin toss. The fact that one event is not influencing another is lost when people begin to feel lucky and believe that a hot hand can influence outcomes.Good luck in coin tosses or other activities where one event is not influencing another, can automatically cause our brains to revert to cause and effect thinking, leading us down a rabbit hole where we can easily misperceive the world around us. For example, it is common to think that because you flipped a coin and got heads seven times you are somehow a bit lucky but mostly skilled and therefore you are willing to bet that heads will come up on your next toss. We actually have to learn that one coin toss is not influencing another, no matter our feelings or the story we tell ourselves about our hot hands. A feeling about our hot hand cannot predict the next toss of the coin or the next team that will win or the next great stock, but luck can play a role in our success (or failure).In the old days we could rely on stories we heard, or even gossip from a neighbor, to predict the future and understand others. But Mauboussin reminds us that serious scientists are careful about sources of evidence and the challenges of prediction. To overcome habits of believing stories, he suggests we need a disciplined approach. Mauboussin references the work of Daniel Kahneman and Amos Tversky, the foremost authorities in the psychology of predictions, to give us well-tested examples. Mauboussin helps us increase our ability to get beyond automatic ways of sensing how the world works and engage in more challenging ways of perceiving the environment.Mauboussin notes that we can, with some effort, break down the function of the brain into two parts, an automatic system (that can be influenced by the higher centers of the brain), and the analytic system. The latter can analyze and make complex computations that over time may become an automatic response that is skillful. Feedback is an essential part of altering our automatic responses. Those who want to become a strong and skilled performer can work on:1) the analysis of how to do things properly,2) the psychology of the effort, and3) the influence of the social system that one is a part of. To learn a new skill may take only 50 hours, but to become more of an expert requires a thousand hours of effort.Many of our automatic ways of thinking are based on the way our ancestors managed to survive. Now days there are dangers that lurk in ignoring a more fact based and mathematical way through the social jungle. We have to learn how stories that mix up luck and skill can lead us astray. Be careful when your friends tell you which stock to buy or when your doctor tells you how his last patient did, without benefit of knowing the base rate of how most patients did. Calling into question our automatic ways of understanding the world costs our brain a lot of energy. Comprising only 2% of our bodies in weight, the brain requires 20% of our energy so we tend to want to conserve energy and therefore question embracing the mental effort.One-way around this problem is to makes it fun to look at processes that enhance out ability to predict. Mauboussin does this by using sports examples and creating web-based games that connect to his book. You can watch one tennis player win a point to see how this influences who will win the match. [...] Then just what can we learn from Colonel Blotto about spreading our resources to defeat Goliath? [...] My favorite is trying to beat the mind reader. [...] But I probably should spend more time understanding how the reinforcing property of success works. [...]Another challenge Mauboussin discusses is the idea of a continuum for predictions. Even if we are reasonably good at figuring out the likely outcome in sports, when we move into larger social systems there are more unusual events that can occur and for which we cannot prepare. Tail events, which are outside our expected range of possibilities, like 9/11 are "black swan" occurrences that by definition not only cannot be predicted but are difficult to prepare for. Think how many people are angry because they believe that someone should have seen "it" coming. There are many possible outcomes Mauboussin shows us to any one event. History is not destiny. Moreover, if you do see it coming then you still have to have an emotional backbone in order to hold onto one's beliefs in the face of intense opposition. Benjamin Graham said, "Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it - even thought others may hesitate or differ". (Mauboussin, Page 172)A few knowledgeable leaders can alter the social system and its habitual way of doing business. In the book Money Ball, recruiters used insider information to hire the best people. They talked about how the players looked, hit and fielded, but there was not a fact-based process to look at the link between behaviors and team wins. By correlating behaviors, like: when do they hit, how often did they get on base, and when did they drop the ball, Billy Bean began to see patterns of behaviors correlate with team wins. Bean not only identified some links between the talents of individual players and team outcomes, he then altered the way players were selected. He used facts to show a connection between who gets on base and the team's ability to win a game, and this was a more successful perception of success than highlighting a player's batting average. Billy Bean was able to see the more complex variables using statistics and seeing connections.Mauboussin notes the importance of understanding reversion to the mean. Reversion to the mean identifies system level properties enabling us to consider an individual's very good or bad performance outcomes over time. Put another way, extreme results are unlikely to continue, like the upward trajectory of the price of Apple stock. Regression analysis allows us to see how individual performance, which in some case may be influenced by luck, smooth out over time. Out performing may be luck, but in some cases, as in mutual fund success, superior skill can be clearly distinguished. In that case it takes long periods of time to see who can do better than luck alone would predict. You can see some of this in game format on Mauboussin's web site. [...]Mauboussin usefully suggests ways for readers to improve skills, such as using checklists, encouraging feedback and/or hiring a good coach to give an outside viewpoint and help manage "magical thinking". He also suggests writing down the outcome we expect when making decisions. These disciplines enable us to learn from mistakes and exercise humility about our ability to evaluate risk and to predict outcomes,As Mauboussin points out, we are all in the business of forecasting. Considering the psychological, analytical and procedural barriers to untangling luck and skill, this book gives us clarity on processes involved in decision-making and tips to improve performance. Reading or studying this book helps us to learn about deep processes that are not commonsense or intuitive. We can develop discipline about decision-making processes that impact our lives and have fun while we are doing it. Or we can also depend on skill and hope for luck.Andrea Schara[...]

I bought this book because it showed up more often than any other on some year-end lists of books that investment professionals recommended. It also deals with topics I spend a lot of time thinking about - the untangling of skill and luck, and what are the keys to success that a person has control over.It was well done if somewhat different from my expectations. The first 2/3 of the book are essentially a gentle introduction to statistics using examples from sports (sabermetrics), business strategy and investing, on the apparent assumption that most readers will be familiar with at least some of these contexts. I was not expecting this amount of the book to consist of explaining statistical analysis. I did not object as it was exceptionally lucidly written and he does an exceptional job of weaving the statistical points into the three fields he is using for context. The research he references is recent and there is quite a lot of it cited.The last third was more of the traditional "business book", making specific recommendations about how to use what you've just learned to become more intelligent about pursuing success. There are, however, no ground-breaking insights in here, the potential buyer should note.The book was shorter than I thought. About 20% of the pages are appendices, etc. As it is lucidly written, it was easy to plow through the roughly 220 pages of actual text. There were several really memorable anecdotes he inserts to illustrate points.I did, however, feel that several points were not well made. It is, I think, a common problem when writing about statistics - certainly journalists prove that nearly every time they write about a study in some field. It is really hard to keep the discipline of being precise and correct about what are always estimates and tendencies. The last example of this in the book is fresh in my mind so I will use it as the example - he says that "reversion to the mean" means that if you give a test on each of two consecutive weeks, the highest scorers on the first test will tend to get lower grades on the second, and conversely for the lowest scorers. I think this is clearly not true, except where the class is at a fairly even skill level to begin with, which is rare. In my experience, in any more diversified class, students tend to repeat their performance level fairly often and don't revert to the mean. 4.0 students tend to score highly most of the time!Also, he gets very sloppy discussing the "Matthew effect", which is a name for the phenomenon that "the rich get richer and the poor get poorer". He says this is all attributable to "luck" but does not use any of the statistical methods he discusses earlier to identify luck separately from skill to demonstrate his claim. His examples were poor as well: he cites the victory of VHS over Betamax and Windows OS over unspecific competition which I assume was Apple. He says the competing products were substantially similar and the resulting market share was "out of all proportion" to the cost of producing the marginal product. Obviously those examples are poor because in both cases the winning product was itself superseded or its market share cut into within a few years. Neither is a case of "the rich get richer" or "winner take all" unless you stopped measuring wins in the 90's. It was "winner wins for a while" - until it didn't. And I would disagree that the only relevant distinction is product quality and everything else is "luck". That is what business strategy is all about. MS had a better strategy initially than Apple. Apple was all about making clear it was the anti-IBM and going it alone. Unfortunately the marketplace was not as anti-IBM as Apple thought, and also MS's decision to stick with software turned out to create opportunities for lots of other businesses to step in and share and bear costs of constructing the marginal product while Apple had to fund and build a whole new computer to sell one additional copy of its software. So I don't see that as just plain "luck" at all.But, having got that off my chest, I thought it was a pretty well written book, although like most business books, it is far better explaining the past than solving for the future.

This book is a classic that one can read and re-read to understand the role luck plays and how one should focus on developing skill and improve odds for success where luck is involved.It has some wonderful insights that prompt one to think about business, sports and investing in a different light altogether. It's a book that one shouldn't miss out on.

Great book

Ou est l équation ? ( je peux me tromper )

No problems

Complements Taleb's ideas about luck and it's rule in success in a very technical way.