Tag Archives: chance

Perseverance Increases Skill Increases Luck: “The Harder I Work, The Luckier I Get”

Samuel Goldwyn

Samuel Goldwyn

Thomas Jefferson

Thomas Jefferson

Samuel Goldwyn recast Thomas Jefferson’s earlier observation: “I am a great believer in luck, and I find the harder I work, the more I have of it.”

Michael Mauboussin, of Columbia University, and previously Chief Investment Strategist at Legg Mason Capital Management Inc. investigated this relationship between effort and luck in his book, The Success Equation.The Success Equation

Michael Mauboussin

Michael Mauboussin

Mauboussin, an innovator in behavioral finance, adopted Harvard biologist Stephen Jay Gould’s “paradox of skill” to analyze the interaction of effort, skills, and luck, and best strategies to optimize outcomes in investing, sports, and career performance.

Stephen Jay Gould

Stephen Jay Gould

He posits that as skill improves in activities where outcomes are affected by skill and luck, the standard deviation of skills narrows.
In this case, luck becomes more important in determining outcomes:

Whenever you see an outlier in sports, it is always a combination of really good skill and really good luck… (Often) they are about one and a half or two standard deviations away from the average…not all skilled players have (winning) streaks, but all (winning) streaks are held by skillful players.”

For example, as investors become more sophisticated and have access to advanced computational tools, as athletes benefit from targeted training and development regimens, and as students are groomed for admission to top universities, differences among these skilled performers decreases.
Chance influences can determine outcomes.

Mauboussin says that luck has several elements:

  • Affects an individual or organization,
  • May be evaluated as “good” or “bad”
  • Another outcome could have occurred
  • The outcome is uncontrollable, but is comprised of several elements

To increase luck, he advises assessing each contender’s strength in the situation and finding “…something completely different to get you on the right side of the tail of the skill distribution,” such as employing an unusual or unexpected tactic.

The stronger player has positive asymmetric resources, so the effective strategy is to simplify the game.
In contrast the underdog should seek to complicate the game, such as through disruptive innovation, a flank strategy or a guerilla tactic.

Because most people have a bias toward optimism and overestimate personal capabilities, it may be difficult to assess oneself as an “underdog” in a performance situation.

Daniel Kahneman

Daniel Kahneman

Nobel Prize winner Daniel Kahneman and Amos Tversky explained that individuals who adopt an inside view gather substantial information, combine it with their own inputs, then project into the future without considering “distributional information” about a wide variety of previous instances.
This approach risks developing an idiosyncratic, overconfident perspective by underestimating costs, completion times, and risks of planned actions, while overestimating benefits.

Amos Tversky

Amos Tversky

In contrast, people who adopt the outside view consider the problem as an instance of a larger reference class and consider the entire distribution of outcomes when this type of situation occurred previously.
This approach can reduce overconfidence.
However, this approach could discourage entrepreneurs, who will realize that a small percentage actually succeeds.

In addition, besides the bias toward overconfidence, people tend to “under-sample” instances of failure when a previously successful approach is applied in a new situation and doesn’t succeed.

Nate Silver

Nate Silver

Sabermetricians like Nate Silver, posit that worthwhile statistics provide:

  • Persistence or correlation from one period to the next, a strong indicator of high skill
  • Predictive value or high correlation with the target objective

Nate Silver-The Signal and The NoiseThe Oakland As baseball team uncovered these principles in determining that  a superior measure of athletic performance in this sport is on-base percentage rather than the traditional measure, batting average.

In this case, on-base percentage has a higher correlation from one season to the next and a higher correlation with run production than batting average, fulfilling both criteria.

Daniel Kahneman also suggested that skill, expertise, and intuition render more uniform results in a predictable environment.

Thinking Fast and SlowHowever, many organizational environments are unstable and non-linear, rendering experts less accurate because they cannot employ an effective predictive model.

Collective judgments through “the wisdom of crowds” may mitigate the challenges of unstable contexts because they provide more data points.

Mauboussin advocated considering the continuum of stability vs instability in which the issue is situated to determine strategy and to beware of applying simple heuristics that are vulnerable to bias, and social or situational influences.

He suggested the guideline “think twice” to prepare, detect and correct for common mental traps, including:

  • The Inside-only View
  • Tunnel Vision
  • Oversimplification
  • Situational Power
  • Overvaluing Expert Knowledge

-*How do you optimize your performance when chance elements can affect your outcomes?

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Biases in Unconscious Automatic Mental Processing, and “Work-Arounds”

Leonard Mlodinow

Leonard Mlodinow

Leonard Mlodinow’s Subliminal: How Your Unconscious Mind Rules Your Behavior reviews evidence of automatic, out-of-awareness brain processing that handles emotional experience and routine task execution, in the same vein as  best sellers by Nobel laureate Daniel Kahneman (Thinking, Fast and Slow) and writer Malcolm Gladwell (Blink: The Power of Thinking Without Thinking).

Daniel Kahneman

Daniel Kahneman

All three authors outline the potential costs of rapid mental processing: error and bias in perception and decision-making, which are less present during mindful analytic problem-solving.

Mlodinow, a Physics Professor at CalTech, has collaborated with Stephen Hawking on two books, and like Kahneman and Gladwell, is a talented storyteller who explains implications of laboratory-based research on cognition and brain functioning.

Carol Tavris

Carol Tavris

Psychologist Carol Tavris discusses the cost of similar biases in cognitive processing in Mistakes Were Made (But Not by Me): Why We Justify Foolish Beliefs, Bad Decisions, 

Numerous studies of erroneous eyewitness testimony demonstrate that memory is constructed of fragmentary elements “stitched” together to form a cohesive narrative.
This contrasts the notion that memory is a “snapshot” replica of an event.

Opportunities for cognitive error are apparent in this Constructivist view of perception and cognition.

Most authors suggest “mindful” practices to counteract inherent biases in cognitive short-cuts, consciously focusing in present perceptions and experiences.

Mlodinow’s previous book, The Drunkard’s Walk: How Randomness Rules Our Lives, demystifies the use of statistics in everyday life, and prepares readers with considered questions to avoid mis-judgments based on seemingly convincing quantitative data.

He demonstrates the prevalence of chance influences in life outcomes, and the pervasive illusion that people have control over many more outcomes than they actually do.

Mlodinow reminds readers that “success” and “failure” contain random influences, and “success” is more dependent on persistence and maintaining an optimistic outlook than raw ability.

-*What practices have helped you mitigate potential cognitive bias associated with rapid mental processing and cognitive “short-cuts”?

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