Leaderonomics

While “luck” is probably one of the most underrated words in the market, concepts like “hardworking”, “talented” or “persevering” seem to be perceived as variables that explain most of the variation in one’s success. Putting it differently, had you had to regress success on a number of factors, luck would probably not be one of the regressors, but rather part of the error term because, among others, it is very hard, if not impossible to quantify. It could thus be that we do not wish to accept luck as an explanatory variable for our careers, and for good reason.

Imagine someone coming up to you claiming that your success has been largely shaped by nothing else than luck. Had the lucky opportunities you encountered never been there in the first place, you would not have been the person you are today. Of course, such a comparison is not necessarily accurate since one cannot possibly know what would have happened in the absence of a particular set of opportunities. For instance, other equally important events with unknown consequences could have instead come into play. Note that luck could very well emphasize the ability of being offered opportunities that were perfectly aligned with one’s talent and ability to work hard.

However, it appears that luck plays a far greater role than universally regarded. It shall not be necessarily reduced to the sphere of financial success or others such topics, but should also be taken into account when referring to, for instance, life on Earth as we know it. One handy example is that of the Moon, recognized as a significant stabilizer of Earth’s orbital axis. Had it been of a slightly different mass or location, I probably would not have been here to write about it now.

Nonetheless, why is it hard for humans to accept that most of what happens with their careers, life choices and successes is directly or indirectly determined by nothing else than sheer luck?

Every now and then you might hear celebrities and rich people talking about their life retrospectively, and what most of them tend to emphasize throughout their talks is the outstanding desire, seriousness and persistence with which they pursued their goals. Unfortunately, they more often than not tend to forget that plenty individuals also possessing such abilities, including a similar degree of talent are, as it seems, not as successful and rich. Why is that, though?

In an attempt to tackle this question, Italian physicists Alessandro Pluchino and Andrea Raspisarda, along with the Italian economist Alessio Biondo, simulated over a 40 years timespan the career evolution of an imaginary population. They randomly attributed different degrees of talent to each individual and allowed their lives to unfold. Note that all agents started with the exact same level of success, 10 units.

Every 6 months, they would be faced with either a lucky or an unlucky circumstance, conditional on chance. Lucky events would double their amount of success proportional to their talent, while unlucky circumstances would halve it. The idea is that the more talented the individual, the higher the chance that he or she might make the best out of the encountered lucky opportunities and therefore increase his or her success.

The results were far from surprising. To begin with, talent was normally distributed while success was not: 44% of the total amount of success was held by only 20 individuals, out of a sample of 1000. Sounds somewhat familiar? On the one hand, talent naturally played a role in the final outcome. On the other hand, the most successful individuals were not the most talented, but were just extremely fortunate to have encountered a great deal of lucky events that they could capitalize on. In contrast, talent did not necessarily matter when agents were continuously matched with unlucky events. As stated by the authors, “Even a great talent becomes useless against the fury of misfortune”.

Given that whether an agent stumbles upon a lucky or unlucky event is random, there will nevertheless be agents that will only stumble upon lucky events. For the purpose of illustration, imagine having $10 and being able to double this sum every time you guessed the colour of a card that could only be either red or black. Consequently, every time you got it wrong your earnings would be halved.

There will be 1 in approximately 100,000 people getting the colour right 15 consecutive times and 1 in approximately 10 million getting it right 20 consecutive times. If the sample grows (to 7.5 billion for instance), it allows for the probability of huge wins, but also for the probability of very few people being lucky enough to guess the colour for a very large number of consecutive times. There is not necessarily an upper limit that sets a ceiling to the maximum winnable amount: if the population tended to infinity, we could encounter the case where one individual owned the same wealth as approximately all others.

Another important point to be made is that being lucky in the early stages of the game is not as impactful as being lucky in the late stages, but is nevertheless necessary: doubling $10 is quite different from doubling $10 million. The former event is also much more probable: around 50% of individuals will be able to get past the first stage, while very few will get the chance to play in the late ones.

However, this experiment does not deal with an issue which I consider of great importance. In real life, once a certain threshold of success is reached, lucky opportunities tend to become more prevalent. Thus, because you were lucky enough in the past, you will benefit from an increased number of events that might further increase your success in the future and vice versa. The experiment assumes that regardless of one’s success level, the probability of being faced with another lucky opportunity is still 50%.

That’s right, in real life people are rewarded for previously being lucky. Imagine a financial advisor that was lucky enough to pick some successful stocks in the past. Now, everyone suddenly entrusts their money to him, dreaming about convertibles and beach houses. My advice would be to not get overly excited, as the chance of guessing the right colour in subsequent periods considerably diminishes.

It is indeed amazing how newspapers tend to write about The financial advisor that picked the right stocks for a great number of years and subsequently proceed to praise him. He was only one out of we don’t even know how many unsuccessful advisors – he was simply lucky enough to guess the colour for the greatest number of times.

What I find fascinating is that although he is in the point in which the probability of guessing the colour yet another time is the lowest that’s ever been until then, as the probability of one more guessing decreases the more times we correctly guess, that particular point in time nevertheless attracts his greatest number of supporters he ever had.

The Italian researchers also analysed the impact of receiving monetary prizes and funds according to past performance. They found that impact was generally a decelerating function of funding, that is the more funds are being received, the lower the marginal value obtained out of those funds. According to their study, the optimal allocation of capital would consist of equally distributing all available funds to every agent in the population, regardless of past performance. In this way, conditional on the quantity of available funds, between 60% and 100% of the most talented agents will have an above average level of success.

Although an interesting (theoretical) thought experiment, putting such findings into practice is a complicated and troublesome process.

In the end, humans cannot and will not ever stand the mere idea of randomness. After all, we are but winners in a lottery and although we should not feel blessed by that, we do.