Tag Archives: Luck

Talent vs Luck: the role of randomness in success and failure

I must thank my friend and colleague Fuad for pointing to me a remarkable research article entitled Talent vs Luck: the role of randomness in success and failure. You can find the paper on Arxiv in pdf format.

I must say this resonates with research I did in the past on serial entrepreneurs, where I discovered there was no real correlation between experience and success in high-tech entrepreneurship. Here is a link to this work: Serial entrepreneurs: are they better?

If you are interested, just download and read the paper. Here are some short teasers from their paper:

It is very well known that intelligence (or, more in general, talent and personal qualities) exhibits a Gaussian distribution among the population, whereas the distribution of wealth – often considered a proxy of success – follows typically a power law (Pareto law), with a large majority of poor people and a very small number of billionaires. Such a discrepancy between a Normal distribution of inputs, with a typical scale (the average talent or intelligence), and the scale invariant distribution of outputs, suggests that some hidden ingredient is at work behind the scenes. In this paper, with the help of a very simple agent-based toy model, we suggest that such an ingredient is just randomness. [Page 1]

There is nowadays an ever greater evidence about the fundamental role of chance, luck or, more in general, random factors, in determining successes or failures in our personal and professional lives. In particular, it has been shown that scientists have the same chance along their career of publishing their biggest hit; that those with earlier surname initials are significantly more likely to receive tenure at top departments; that the distributions of bibliometric indicators collected by a scholar might be the result of chance and noise related to multiplicative phenomena connected to a publish or perish inflationary mechanism; that one’s position in an alphabetically sorted list may be important in determining access to over-subscribed public services; that middle name initials enhance evaluations of intellectual performance; that people with easy-to-pronounce names are judged more positively than those with difficult-to-pronounce names; that individuals with noble-sounding surnames are found to work more often as managers than as employees; that females with masculine monikers are more successful in legal careers; that roughly half of the variance in incomes across persons worldwide is explained only by their country of residence and by the income distribution within that country; that the probability of becoming a CEO is strongly influenced by your name or by your month of birth; that the innovative ideas are the results of a random walk in our brain network; and that even the probability of developing a cancer, maybe cutting a brilliant career, is mainly due to simple bad luck. Recent studies on lifetime reproductive success further corroborate these statements showing that, if trait variation may influence the fate of populations, luck often governs the lives of individuals. [Page 2]

So here are some striking results:

But to understand the real meaning of [these] findings it is important to distinguish the macro from the micro point of view. In fact, from the micro point of view, following the dynamical rules of the model, a talented individual has a greater a priori probability to reach a high level of success than a moderately gifted one, since she has a greater ability to grasp any opportunity that will come. Of course, luck has to help her in yielding those opportunities. Therefore, from the point of view of a single individual, we should therefore conclude that, being impossible (by definition) to control the occurrence of lucky events, the best strategy to increase the probability of success (at any talent level) is to broaden the personal activity, the production of ideas, the communication with other people, seeking for diversity and mutual enrichment. In other words, to be an open- minded person, ready to be in contact with others, exposes to the highest probability of lucky events (to be exploited by means of the personal talent). On the other hand, from the macro point of view of the entire society, the probability to find moderately gifted individuals at the top levels of success is greater than that of finding there very talented ones, because moderately gifted people are much more numerous and, with the help of luck, have – globally – a statistical advantage to reach a great success, in spite of their lower individual a priori probability. [Page 14]

The authors draw some practical recommendations: for example, for strategies about funding research among a diversity of talented people looking at the table [below], it is evident that, if the goal is to reward the most talented persons (thus increasing their final level of success [C]), it is much more convenient to distribute periodically (even small) equal amounts of capital to all individuals rather than to give a greater capital only to a small percentage of them, selected through their level of success – already reached – at the moment of the distribution. The histogram shows that the “egalitarian” criterion, which assigns 1 unit of capital every 5 years to all the individuals is the most effcient way to distribute funds. [Pages 17-18]

Finally, the environment may have a role, such as improbing education, hence talent: Strengthening the training of the most gifted people or increasing the average level of education produce, as one could expect, some beneficial effects on the social system, since both these policies raise the probability, for talented individuals, to grasp the opportunities that luck presents to them. On the other hand, the enhancement in the average percentage of highly talented people who are able to reach a good level of success, seems to be not particularly remarkable in both the cases analyzed, therefore the result of the corresponding educational policies appears mainly restricted to the emergence of isolated extreme successful cases. […] Also, it results that increasing the variance without changing the average, enhances the chances for more talented people to get a very high success. This, on one hand, could be considered positive but, on the other hand, it is an isolated case and it has, as a counterpart, an increase in the gap between unsuccessful and successful people. Increasing the average without changing the variance induces that also in this case the chances for more talented people to get a very high success are enhanced, while the gap between unsuccessful and successful people is lower than before. [Pages 20-21]

As a stimulating conclusion, the authors write: Our results highlight the risks of the paradigm that we call “naive meritocracy”, which fails to give honors and rewards to the most competent people, because it underestimates the role of randomness among the determinants of success. In this respect, several dfferent scenarios have been investigated in order to discuss more effcient strategies, which are able to counterbalance the unpredictable role of luck and give more opportunities and resources to the most talented ones – a purpose that should be the main aim of a truly meritocratic approach. Such strategies have also been shown to be the most beneficial for the entire society, since they tend to increase the diversity of ideas and perspectives in research, thus fostering also innovation. [Page 23]

Entrepreneurship, startups and luck : Google according to Daniel Kahneman

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I offered Thinking Fast and Slow by Daniel Kahneman a few months ago and this morning the reader made me read pages 200-1. It’s a great lesson about how luck plays an important role in startup creation, through the Google story. So I give you below the full extract.

“A compelling narrative fosters an illusion of inevitability. Consider the story of how Google turned into a giant of the technology industry. Two creative graduate students in the computer science department at Stanford University come up with a superior way of searching information on the Internet. They seek and obtain funding to start a company and make a series of decisions that work out well. Within a few years, the company they started is one of the most valuable stocks in America, and the two former graduate students are among the richest people on the planet. On one memorable occasion, they were lucky, which makes the story even more compelling: 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.

A detailed history would specify the Google’s founders, but for our purposes it suffices to say that almost every choice they made had a good outcome. A more complete narrative would describe the actions of the firms that google defeated. The hapless competitors would appear to be blind, slow, and altogether inadequate in dealing with the threat that eventually overwhelmed them.

I intentionally told this tale blandly, but you get the idea: there is a very good story here. Fleshed out in more detail, the story could give you the sense that you understand what made Google succeed; it would also make you feel that you have learned a valuable general lesson about what makes businesses succeed. 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. The fact that many of the important events that did occur involved choices further tempts you to exaggerate the role of skill and underestimate the part that luck played in the outcome. Because every critical decision turned out well, the record suggests almost flawless prescience – but bad luck could have disrupted any one of the successful steps. The halo effect adds the final touches, lending an aura of invincibility to the heroes of the story.

Like watching a skilled rafter avoiding one potential calamity after another as he goes down the rapids, the unfolding of the Google story is thrilling because of the constant risk of disaster. However, there is an instructive difference between the two cases. The skilled rafter has gone through the rapids hundreds of times. He has learned to read the roiling water in front of him and to anticipate obstacles. He has learned to make the tiny adjustments of posture that keep him upright. There are fewer opportunities for young men to learn how to create a giant company, and fewer chances to avoid hidden rocks – such as a brilliant innovation by a competing firm. 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.”

The Halo Effect by Phil Rosenzweig

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When I read that Nassim Nicholas Taleb said this is “one of the most important management books of all time”, I was intrigued. Usually I do not like general business books. But here, not only is it a great book, but fun to read!

What is the halo effect? A tendency to make inferences about specific traits on the basis of a general impression [Page 50].

The author has a major question: Is management a science? Pages 12-17 cover that sensitive topic: “In other fields, from medicine to chemistry to aeronautical engineering, knowledge seems to march ahead relentlessly. What do these fields have in common? In a word, these fields move forward thanks to a form of inquiry we call science. Richard Feynman once defined science as “a method for trying to answer questions which can be put into the form: If I do this, what will happen?” Science isn’t about beauty or truth or justice or wisdom or ethics. It’s eminently practical. It asks, If I do something over here, what will happen over there? If I apply this much force, or that much heat, or if I mix these chemicals, what will happen? By this definition, What leads to sustained profitable growth? is a scientific question. It asks, If a company does this or that, what will happen to its revenues or profits or share price?” [Page 12]

“Our inability to capture the full complexity of the business world through scientific experiments has provided fodder for some critics of business schools. Management gurus Warren Bennis and James O’Toole, in 2005 Harvard Business Review article, criticized business schools for their reliance on the scientific method. They wrote: “This scientific model is predicated on the faulty assumption that business is an academic discipline like chemistry or geology when, in fact, business is a profession and business schools are professional schools – or should be”. The notion seems to be that since business will never be understood with the precision of the natural sciences, it’s best understood as a sort of humanity, a realm where the logic of scientific inquiry doesn’t apply. Well, yes and no.” [Page 14]

Rozenzweig concludes this 1st chapter with a beautiful story (page 16), again from Richard Feynman: In the South Seas, there is a cult of people. During the war they saw airplanes land with lots of materials, and they want the same thing to happen now. So they’ve arranged to make things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head like headphones and bars of bamboo sticking out like antennas – he’s the controller. And they wait for the airplanes to land. They’re doing everything right. The form is perfect. But it doesn’t work. No airplanes land. So I call these things Cargo Cult Science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential, because the planes don’t land. He called that last section Science, Pseudoscience and Coconut Headsets.

Storytelling and science

His criticism in chapter 6 of famous bestsellers In Search of Excellence by Peters and Waterman [page 83] and then of Built to Last by Collins and Porras [page 94] are particularly striking. Stories and science are different and the author explains many delusions created by approximate science:
#1: The Hallo Effect
#2: The delusion of Correlation and Causality
#3: The Delusion of Single Explanations
#4: The Delusion of Connecting the Winning Dots
#5: The Delusion of Rigorous Research
#6: The Delusion of Lasting Success
#7: The Delusion of Absolute Performance
#8: The Delusion of the Wrong End of the Stick
#9: The Delusion of Organizational Physics.
(if you are too lazy to read this great book, have at least a look at https://en.wikipedia.org/wiki/The_Halo_Effect_(business_book))

Rosenzweig tries to explain the complexity of measuring company performance. What are the key elements that managers should take into account for excellence? And Rosenzweig shows that storytelling has been as important as research in that quest. He further claims that authors of bestsellers such as In Search of Excellence, Built to Last or From Good to Great who claim their results were based on research, indeed were more excellent story tellers than rigorous researchers.
“It’s not that the important elements are not right. In Search of Excellence gives eight best practice: a bias for action; staying close to the customer; autonomy and entrepreneurship; productivity through people; hands-on, value-driven; stick to the knitting; simple form, lean staff; and simultaneous loose-tight properties.” [Page 85]

“Whereas in Built to Last, Collins and Porras give their 5 timeless principles: having a strong core ideology; building a strong corporate culture; setting audacious goals; developing and promoting people; creating a spirit of experimentation and risk-taking; driving for excellence”. [Page 96]

“Several researchers have studied the rate at which company performance changes over time. Pankaj Ghemawat at Harvard Business School examined the return on investments (ROI) of a sample of 692 American companies over a ten-year period from 1971 to 1980. He put together one group of top performers, with an average ROI of 39 percent, and one group of low performers, with an average ROI of just 3 percent. Then he tracked the two groups over time. What would happen to their ROIS? Would the gap persist, would it grow, or would it diminish? After nine years, both groups converged together toward the middle, the top performers falling from 39 percent to 21 percent and the low performers rising from 3 percent to 18 percent.” [Page 104]

“These studies, and others like them, all point to the basic nature of competition in a market economy. Competitive advantage is hard to sustain. Sure, if you want to, you can look back over seventy years of business history and pick out a handful of companies that have endured, but that’s selection based on outcomes.” [Page 105]

“Interviews with managers, asking them to look back over the ten-year period and recount their experiences (…) these sort of retrospective interviews are likely to be full of halos, as people take cues from performance and make attributions accordingly.” [Page 108]

Again Rosenzwieg has nothing against interviews, he just warns the reader that they have to be meticulously prepared to avoid any bias and answers based on outcomes.
“Another famous study, the Evergreen project, identified eight practices: strategy; execution; culture; structure; talent; leadership; innovation; and mergers and partnerships (Page 110). Yet once we see that performance is relative, it becomes obvious that companies can never achieve success simply by following a given set of steps, no matter how well intended; their success will always be affected by what rivals do” [Page 116].

“Perhaps the most interesting factor in Big Winners and Big Losers is mentioned as a brief aside but not examined closely: Marcus points out that large companies show up more frequently among the Big Losers, while almost all the Big Winners are small or midsize companies. This observation ought to spark one’s curiosity, because large companies got that way in the first place by doing things well – they didn’t grow by being Losers – yet something seemed to prevent them from maintaining that high performance. Extremer performance, for better and for worse, is more common among small companies”. [Page 132]

But a 10 percent difference in performance doesn’t say anything about what will happen at my company – the impact could be more or less or nothing at all. There’s no guarantee, no promise that inspires me to take action. Books, which provide simple and definitive advice and studies of organizational performance, stand in two very different worlds. The first world speaks to practicing managers and rewards speculations about how to improve performance. The second world demands and rewards adherence to rigorous standards of scholarship. Here science is paramount, storytelling less so. The result is a schizophrenic tour de force in which the demands of the roles of the consultant and teacher are disassociated form the demands of the researcher”. [Page 135]

“According to the Economist, Tom Peters can charge corporate clients up to $85,000 for a single appearance, and Jim Collins commands a fee of $150,000. There’s a lucrative market for spinning stories of corporate success. Will anyone hire (a researcher) at $85,000 or $150,000 a pop to talk about a statistically significant 4 percent difference in performance? Somehow it seems doubtful [page 136].

The test of a good story is not whether it is entirely, fully, scientifically accurate – by definition it won’t be. Rather, the test of a good story is whether it leads us toward valuable insights, if it is inspires towards helpful action, at least most of the time. [Page 137]

Strategy and execution

“Here’s how I like to think about company performance. According to Michael Porter of Harvard Business School, company performance is driven by two things: Strategy and execution.” [Page 144]

But both are full of uncertainties: “Strategy always involves risk because we don’t know for sure how our choices will turn out. […] A first reason has to do with customers. […] Sam Philips, the legendary Sun records producer, once cautioned, “Anytime we think you know what the public’s going to want that’s when you know you’re looking at a damn fool when you’re looking in the mirror”. Market reaction is always uncertain, and smart strategists know it. [Page 146]

“A second source of risk has to do with competitors. […] An entire branch of economics, game theory, has grown up around a simple form of competitive intelligence. […] A third source of risk comes from technological change. […] In his groundbreaking research Clayton Christensens at Harvard Business School showed that in a wide range of industries, from earth-moving equipment to disk drives to steel, successful companies were repeatedly dislodged by new technologies. [Page 147]

Jim Collins expressed surprised that [his] eleven Great companies came from ordinary, unspectacular industries. […] I suspect a different interpretation. These industries can be described as dowdy, but a better word might be stable. They were less subject to radical changes in technology, were less susceptible to shifts in customer demand, and may have had less intense competition. [Page 147]

As James March of Stanford and Zur Shapira of New York University explained, “Posthoc reconstruction permits history to be told in such a way that “chance”, either in the sense of genuinely probabilistic phenomena or in the senses of unexplained variation, is minimized as an explanation.” But chance does play a role, and the difference between a brilliant visionary and a foolish gambler is usually inferred after the fact, an attribution based on outcomes. [Page 150]

There are fewer unknowns […], yet execution still involves a number of uncertainties. [Page 151] And that brings us to the best answer I can provide to the question, What leads to high performance? If we set the usual suspects of leadership and culture and focus and so on – which are perhaps causes of performance – we’re left with two broad categories: strategic choice and execution. The former is inherently risky since it’s based on our best guesses about customers, about competitors, and technology, as well as about our internal capabilities. The latter is uncertain because best practices that work well on one company may not have the same effect in another. […] Wise managers know that business is about finding ways to improve the odds of success – but never imagine that success is certain. If a company makes strategic choices which are shrewd, works hard to operate effectively, and is favored by Lady Luck, it may put some distance between itself and its rivals, at least for a time. But even those profits will tend to erode over time. [Page 156]

The answer to the question what really works? is simple: Nothing really works. At least not all the time. […] So what can be done? A first step is to set aside the delusions that color so much of our thinking about business performance. To accept that few companies achieve lasting success. To admit that the margin between success and failure is often very narrow, and never quite as distinct or as enduring as it appears at a distance. And finally, to acknowledge that luck often plays a role in company success. [Page 158]

Rosenzweig finishes his book with examples of bold decisions from leaders at Goldman Sachs, Intel, BP, Logitech. Entrepreneurship inherently involves risks, but not doing anything would be much riskier.