The question whether success is due primarily to luck or skill is an old one, and people have come down on both sides of the issue. How would you classify investors who have been successful? Some finance professors believe investors’ success is due more to luck. But does that mean that Warren Buffett is just a lucky guy? Most would argue that he is also exceptionally skilled as an investor.
What also complicates the situation is what is called the paradox of skill. As the skill level increases, luck begins to play more of a part in how things come out. It happens with investing, and with something like the World Cup.
We often use skill and luck as categories to classify the many things that lead to a person’s or a company’s success. Put simply, skill describes what kinds of things we can do. In poker, for example, a skill would be being able to bluff, plan ahead, and figure probabilities. But luck can be defined as something that happens to us. In poker, luck would be drawing good cards; in football, having the wind shift in the fourth quarter.
But, according to Andrea Jones-Rooy and Scott Page, researchers at the University of Michigan, there is one more factor to be considered here. That is complexity, which can be defined as interesting patterns and structures that grow out of the interaction of different parts. These interactions are not easy to get a handle on. They are not so random that we cannot predict anything at all about them, nor are they so ordered that we can make definite predictions. But they can determine who wins and who loses. They can also give a more subtle understanding of situations than the simple two-sided equation of skill and luck.
So, using all three concepts, we can see that outcomes are somewhat predictable, but still full of surprises. It’s the reason why sports betting is such a popular pastime. Complexity can help us understand how skill and luck play off each other. For example, if two people were to compete in a 10-yard dash, because of the shortness of the distance, luck will play a greater role. But if we increased the distance, skill would come into play more. But in a more complex sport, such as soccer, skill and luck interact. Soccer players use their skill to get themselves where they need to be on the field and in a position to score, but whether a particular shot goes into the goal often depends a good deal on luck.
But in more complex situations, skill incorporates three things – ability, being able to shift resources or talent, and being able to predict the actions of others and the impact that will have. So in complex situations, it’s not enough just to have the raw ability, you have to know how to adapt to the situation, when to follow one course, or when to use another. What worked yesterday may not work tomorrow. And this involves some luck.
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