LUCK AND THE PARADOX OF SKILL
By Karl Arnold Belser
05 December 2014
Michael Mauboussin's book The Success equation talks about the paradox of skill. The following definition of The Paradox of Skill was taken from a Wharton Interview about the book:
The “paradox of skill” is. Specifically, it says that in activities where skill and luck define outcomes, as skill improves, luck becomes more important in determining outcomes. [By that definition,] more skill means more luck, which seems very paradoxical.
The Paradox of Skill goes to the center of why I am writing this blob. In short if everyone has a very high skill level, say in investing, then it is very difficult for any one person to be outstanding. Hence, it will be unexpected and unpredictable events that will make a difference in investing success, and I want to be conscious of when something unexpected occurs.
Mauboussin discusses luck as follows:
Luck exists when three conditions are in place. Number one is that it happens to an individual or organization, so it could be you or your team or your company. Second, it can be good or bad…. The third, and I think really essential [condition], is that it’s reasonable to expect a different outcome could have occurred. When those three things are in place, there is luck. Now, by my definition, another, simpler way to think about it is: What’s in your control versus what’s out of your control? Luck would be what’s out of your control.
I use the aphorism "Luck is when opportunity meets a prepared mind". I am preparing myself by writing this BLOG as a way to become more conscious. I discuss this "becoming conscious" problem in my post Thinking Errors.
Mauboussin suggests thatt consciousness results in innovation, or thinking outside the box.
Shaun Parish's article Innovation: The Attacker's Advantage from the Farnam Street Blog hits the nail right on the head. The S-Curve of skill development shows that with time incremental increases in effectiveness decrease for a given way of doing things. He shows on S-Curve being followed by a second S-Curve based on an innovative change. Initially this second S-Curve is not competitive, but has the potential to become very competitive with time. This I think is the name of the game, namely "Recognize new ideas that have future potential.
Clayton Christenson describes why the paradigm shift is so hard for individuals or corporations to implement in his book The Innovators Dilemma. Innovation requires that the new ideas or products effectively kill off the revenue from the old way of doing things, and managers are paid to keep current revenue high. They do not have an incentive for change.
Another factor that Mauboussin points out is that of thinking that you know when, in fact, you don't know. This is the Dunning-Kruger effect.
Clearly for the old paradigm one might have a good mental model for what is happening. This knowledge provides a predictable environment for change even though the possibility of large incremental change diminishes.
The disruptive environment of a new and poorly understood idea, the new paradigm, might have a high degree of uncertainty. Thus it might be difficult to get consensus about following a new approach at the expense of what is already working.
Nassim Taleb points out in his book Antifragile that the resolution of what a new paradigm will be might take many false starts an a lot of trial and error. This in short is the innovators dilemma and there is no easy way out. All one can do is to pay attention to what is going on in the world and take action when opportunities arise.
Last updated December 5, 2014
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