Was It Luck or Was It Skill?

10 years ago I was about to start my first class at Harvard Business School.  I was embarking on a 2-year stretch of ~750 classes where students repeatedly debate various questions about leadership, organizational structure, strategy, finance, marketing, operations, and ethics of companies and protagonists around the world.

One of the most common topics for debate was the role of luck in success.  Was the rise of “Fill in the Blank” Millionaire luck or skill/hard work? 

To me, this question was ridiculous.  I couldn’t believe the number of people arguing hard for one or the other when the clear answer (as with many questions in life) was obviously somewhere in the middle.  People like talking as if answers only have 2 possibilities and thus are binary but that is rarely the case.

As a quick digression, using the word “binary” made me think of my favorite nerd T-shirt…it’s kinda funny if you’re a math dork like me.

If you have no idea why this is funny, that’s a good thing.  This is one of the rare jokes in this world where you’re definitely cooler if you don’t get it.  For those who aren’t math geeks but are curious, “10” in binary numbers (think computers language) means 2…hence the joke.  I see you’re still not laughing.  Ok, I admit it sucks but my dad has a PhD in Math so maybe this will make him proud.  

Anyway, back to the topic…I was making the point that I don’t think success of any kind can ever be 100% attributed to luck or skill alone.  It’s always a little of both.

Are there Hedge fund managers who can consistently beat the market?  Yes.  Is it clear how much of their success is due to skill vs. luck?  Not so much.  There are many studies that have looked at just this.  It turns out that while many funds do beat the market, very few statistically have track records of outperformance that can be clearly attributed to skill. 

Since there are ~10,000 Hedge funds, it’s not hard to find a few that consistently beat the market.  If beating the market were a 50/50 proposition (a coin flip) then you’d expect ~5000 to beat the market the first year.  Out of those, half of the 5000 (~2500) would again beat the market the 2^nd year, followed by ~1250 the 3rd year, etc.  If you carry this out, you’d expect more than 150 funds to beat the market 5 years in a row…purely by luck!  Now, I’m not saying there isn’t skill involved but the role of luck on trades in terms of timing and other factors is certainly not 0.   

I’m pretty sure you won’t hear this on CNBC though.  When they have their “experts” on, it’s hilarious how they debate against each other.  One will say this is a great time to invest in the market while the other will say it’s a terrible time for the market.  A few months later, not so shockingly, one of them ended up being right!  When they invite the guests back, the “correct” one always sounds so confident as if there was never a doubt from his analysis.  Of course, the other guest attributes his incorrect forecast due to some “unforeseen” circumstances, or that he was really talking about a different time frame, etc. 

It’s very interesting that people tend to attribute positive results to their own skill and negative results to bad luck.

The book Outliers lays out a great case for the role of luck in terms of history’s wealthiest people.  In this case, Malcolm Gladwell talks about when many Billionaires were born and how that played a key role in their success.  It’s tough to argue that when you were born had anything to do with skill.  On the other hand, there were hundreds of millions of people born in the same range of dates that never ended up making Billions so it’s tough to argue that skill isn’t critically important as well.

Hold on....for a minute there I thought I was writing for the Harvard Business Review.  


Let’s move on to how luck vs. skill applies in athletics and more importantly, to Schmeis35for35.  A few examples:

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•       In my attempt in April to finish top 15% in a sprint triathlon, I missed it by 17 seconds but lost a full minute from someone directing me the wrong way on the running course.  Did bad luck cause me to miss the goal?  Yes.  Was it solely the reason I missed my goal?  Of course not.  If I had more skill from analyzing the course, training harder, etc. I would have been able to overcome the bad luck.

•       In my attempt to finish a Half Ironman in under 6 hours, the race happened to fall on a 95 degree day and severe cramping in my legs over the last few miles contributed to me missing the goal by 10 minutes.  A month later, NC still has yet to have a day anywhere near as hot as that day in May.  Was bad luck to blame?  Yes.  Again though, there is a gigantic skill component related to more training in hot weather that could have helped.

•       Gladwell also discusses in Outliers the role of a child’s birthday and how that seemingly meaningless date plays such a large role in how dominant the kid can become in Hockey.  The short version is that being one of the oldest kids in your class at an early age is extremely advantageous because you’re more likely to be bigger (and therefore more dominant), which leads coaches to notice you at a young age so you get better coaching, which makes you a better player, etc.  To make it to the NHL, do you only have to be born at a certain time of year?  Of course not, that’s absurd…but it doesn’t hurt.

•        Just today, Tiger Woods was trailing in the final holes of the Memorial Tournament on the PGA tour when he made a ridiculous flop shot from off the green and then went on to win the event.  Was it luck or was it skill?  Again, the only credibly answer is it’s a little of both.  He has more skill to play that shot than anyone in the world but the fact that he made it at that moment was incredibly lucky as he probably would make that 1 out of 100 times. 

There are so many good examples in the luck vs. skill debate.  I think my favorite story around the topic though involves Jason Bohn, a little-known professional golfer on the PGA tour.  

When he was in college at age 19, he paid $10 in a fundraiser for the right to hit 10 golf balls from 135 yards.  For each ball he successfully hit in a 10 foot circle, he would get a shot to participate in the semifinals of the contest the following weekend.  He ended up hitting 1 of the 10 balls in the circle and then didn’t think much about it.

The following weekend was Halloween and he went out drinking and was hung over the next morning (the day of the semifinals).  His roommate woke him up and dragged him to the course to hit his 1 shot.  There were 150 shots in the semifinals and the closest 12 to the pin got a shot in the finals.  Jason ended up hitting his shot to 3’ 8” and then headed to the driving range to take a nap while he waited to see if that was good enough to make the final 12.

After a long wait, it turns out his shot put him in the top 12 so he was on to the finals…a $1 Million hole-in-one contest.  He was a freshman at the time and his coach told him that prizes were available in the final round but if he won anything valued at more than $500 he would have to forfeit his NCAA eligibility. 

Long story short, Bohn stepped up to the 135 yard shot and he drained it!  He got a hole-in-one and won $1 Million.  

At the time, he was a red-shirt freshman who had never competed in an NCAA match.  He wasn’t even highly recruited so there was no reason to think he’d ever make a living off golf.  Still, the decision was easy.  Take the money and forget playing in college.  The $1 Million was enough to give him the freedom to leave school and pursue golf full time.  He practiced for years backed by his bankroll and is now a regular on the PGA tour and has won almost $10 Million in career earnings.  Crazy story for sure but also a great case study in the luck vs. skill debate.

In nearly all examples, in order to have huge amounts of success, having luck is necessary but not sufficient.  Skill is also always necessary but rarely sufficient.  Seem obvious?  I completely agree but it must not be given the number of arguments I heard consistently at HBS and I see from talking heads on TV.

Anyway, I clearly don’t have a real point with all of this.  I think I was just trying to somehow seamlessly transition to getting you to watch another one of my random attempts at the 35 goals.  


Next up?  Item number 5 on the list:  “Make a ½ court shot.”  You’ve got to admit, shooting a half courter in basketball seems like a perfect microcosm of the whole luck vs. skill debate.  I’m going for a 42 foot shot…half of the 84 foot regulation high school and college court.  Let’s give that a try!

BAM!  With that swish, I’m up to 6 goals accomplished and only 29 remaining.  How great would it have been if I nailed that first shot?  Legendary.  I thought for sure it was good when it left my hand but it wasn’t to be.  I was happy to drain the 5^th one though.

Now for the obvious question:  was the shot luck or was it skill?

Schmeis