From Daniel Kahneman “Thinking, fast and slow”
How Much of Success is Due to Luck?
- “A recurrent theme of this book is that luck plays a large role in every story of success; it is almost always easy to identify a small change in the story that would have turned a remarkable achievement into a mediocre outcome.” (p.9)
- Daniel Kahneman’s favorite formula:
Success= talent + luck
Great Success= a little more talent + a lot of luck
Examples:
Was Google’s Success Due to Skill or Luck?
- “Unfortunately, there is good reason to believe that your sense of understanding and learning from the Google story is largely illusory. The ultimate test of an explanation is whether it would have made the event predictable in advance. No story of Google’s unlikely success will meet that test, because no story can include the myriad of events that would have caused a different outcome. The human mind does not deal well with nonevents.” (p.200)
“a year after founding Google, they were willing to sell their company for less than $1 million, but the buyer said the price was too high. Mentioning the single lucky incident actually makes it easier to underestimate the multitude of ways in which luck affected the outcome.” (p. 200)
“Of course there was a great deal of skill in the Google story, but luck played a more important role in the actual event than it does in the telling of it. And the more luck was involved, the less there is to be learned.” (p. 201)
Do Leaders and CEO’s Influence the Outcome of a Firm?
Yes, but much less than people think. Luck has a lot to do with it.
- “CEOs do influence performance, but the effects are much smaller than a reading of the business press suggests.” (p. 205)
- “A very generous estimate of the correlation between the success of the firm and the quality of its CEO might be as high as .30,”(p. 205)
- “A correlation of .30 implies that you would find the stronger CEO leading the stronger firm in about 60% of the pairs—an improvement of a mere 10 percentage points over random guessing, hardly grist for the hero worship of CEOs we so often witness.”(p. 205)
Can Business Books Like “Built to Last” Teach You How to Create an Incredible Business?
- “The basic message of Built to Last and other similar books is that good managerial practices can be identified and that good practices will be rewarded by good results. Both messages are overstated. The comparison of firms that have been more or less successful is to a significant extent a comparison between firms that have been more or less lucky.” (p. 207)
After the book “Built to Last” came out, the outstanding companies that were mentioned did worse, and the less successful companies became successful.
“On average, the gap in corporate profitability and stock returns between the outstanding firms and the less successful firms studied in Built to Last shrank to almost nothing in the period following the study.” (p. 207)
When Well Known Companies Fall, is it Because They Got Complacent?
- No. Since they did well because of luck, they will fall because luck can’t last forever.
- “According to Fortune’s most admired companies, over a 20 year period, the worst ranking companies went to earn higher stock market returns than the best ones. You probably will have a causal explanation. The better ones got complacent, and the worse ones were hungrier. No the reason is simply Regression to the Mean. The good companies went back to their baseline because their luck ran out. The bad companies also went up to their baseline because their bad luck ran out.“
- “Stories of how businesses rise and fall strike a chord with readers by offering what the human mind needs: a simple message of triumph and failure that identifies clear causes and ignores the determinative power of luck and the inevitability of regression. These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them.” (p. 207)
Do Stock Pickers Pick Good Stocks Due to Their skill?
- Nope, it was luck
- “The buyers think the price is too low and likely to rise, while the sellers think the price is high and likely to drop. The puzzle is why buyers and sellers alike think that the current price is wrong. What makes them believe they know more about what the price should be than the market does? For most of them, that belief is an illusion.” (p. 213)
- “There is general agreement among researchers that nearly all stock pickers, whether they know it or not—and few of them do—are playing a game of chance. The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are no more accurate than blind guesses.” (p. 215)