Thursday, March 15, 2007

Success, Luck, and Survivorship Bias

I've been thinking a great deal recently about successful people and what made them successful. By "successful", I'm using an admittedly-narrow definition of financial success. I've never been comfortable relying on luck for my finanical well-being. I'll go so far as to say I have this illusion (delusion?) that a person's knowledge, skill, and hard work should trump luck in the long-run. Lately, I'm starting to doubt that. I'm starting to wonder just how big a role luck plays in determining one's success. Are the guys on the top of the Forbes list of riches Americans more lucky than good?

Certainly there are some very skilled people on that list, people who have created a great deal of value for society and their personal fortunes are a small fraction of that value creation. However, I'm starting to think that there is a lot of survivorship bias as well. Certain people were merely lucky and have accumulated vast amounts of money as a result. I starting thinking about exactly what made these individuals lucky. I think there is a two-part answer. First, the individual geniunely took a big risk and lightning struck. Then, success became a self-fulfilling prophesy as that person's deal-flow improved dramatically. With a solid financial backing, the individuals could afford to wait for the perfect deal. It's like having the bases loaded, a 3-0 count, and Barry Bonds batting behind you -- you sit and wait for a pitch you know you can hammer out of the park.

I think the lessons are:
  1. Without great risk, there can be no great reward.
  2. Maximize your opportunity-flow.
  3. Patience is a good thing.
  4. Don't be fooled into thinking all successful people are skillful.
  5. Rich Aurilia really wasn't that good of a baseball player at all!


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