The Success Equation: Untangling Skill and Luck in Business

When it comes to hard decisions, humans often have a hard time separating the process of decision-making from the result. The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael Mauboussin is a great read on how to analytically approach the concept of luck in decision-making, providing insight on how to effectively manage the process of decision-making when you have a range of activities on the “luck-skill” continuum. For example, when you have an activity where the variables are stable (e.g. golf or tennis) and there is a strong correlation between effort and result, deliberate practice to build skill is the only reliable path to improvement. Conversely, on the other side of the luck-skill continuum, luck can overwhelm skill over short periods of time for activities where there is a low correlation between effort and outcome (e.g. business strategy and investment management). In this case, the path to success in the long-run is to focus on a strong, repeatable process.

Another important business strategy highlighted by Mauboussin is how to increase your chances of success based on your location on the luck-skill continuum. For industries where there is already a well-established player dominating the market share, the key to success for new entrants usually involves incorporating an aspect of luck or complication into the decision-making framework. When business disruptors succeed, it’s typically because they have used a completely new business model that may have not been attractive enough for the larger players to develop initially. Their toe-hold eventually allows the disruptors to gain market share and encroach on the incumbent’s territory. Horace Barlow, a neuroscientist, defines intelligence as “the art of good guesswork”, with good guesswork being “the capacity to detect new, non-chance associations.”

While there may be evolutionary reasons why humans tend to psychologically attribute good outcomes with skill and bad outcomes with luck, it can be enlightening to examine these behavioural biases and focus on understanding what is and isn’t within our individual control when it comes to decision-making. For anyone interested in analytically disentangling skill and luck in the decision- making process, this book by Mauboussin is one you won’t want to miss.