Monday, August 27, 2012

The "Lucky Fool" path to success

There are a number of psychological-statistical traps that can throw people of as to understanding what leads to successful outcomes.  The one I see the most in business is Survivor Bias, but Fooled by Randomness (confusing random outcome for talent driven success) is a very close cousin.

Nassim N. Taleb, NYU- Poly, August 2012 (hat tip: Business Insider via NC)

A spurious tail is the performance of a certain number of operators that is entirely caused by luck, what is called the “lucky fool” in Taleb (2001). Because of winner-take-all-effects (from globalization), spurious performance increases with time and explodes under fat tails in alarming proportions. An operator starting today, no matter his skill level, and ability to predict prices, will be outcompeted by the spurious tail. This paper shows the effect of powerlaw distributions on such spurious tail. The paradox is that increase in sample size magnifies the role of luck.

Taking it outside the context of finance, in a very large market you are likely to reach a critical mass where there are enough competent players, and knowledge is sufficiently diffused, that there is no real possibility that any one player will have any particular advantage over another.  To the extent that some has an advantage, the noise of random results would prevent you from ever knowing for sure who they were.

This doesn’t mean that you can be completely clueless and succeed.  It just means that once you get beyond a certain level of wide spread competence, luck (randomness) is the larger force in play.  This can be true in everything from contracting, to survival situations.

No comments: