Nassim Taleb writes on the role of luck in financial markets in Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
There is one world in which I believe the habit of mistaking luck for skill is most prevalent – and most conspicuous – and that is the world of markets. By luck or misfortune, that is the world in which I have operated most of my adult life. It is what I know best. In addition, economic life presents the best (and most entertaining) laboratory for the understanding of these differences. For it is the area of human undertaking where the confusion is greatest and its effects the most pernicious. For instance, we often have the mistaken impression that a strategy is an excellent strategy, or an entrepreneur a person endowed with “vision,” or a trader a talented trader, only to realize that 99.9% of their past performance is attributable to chance, and chance alone. Ask a profitable investor to explain the reasons for his success; he will offer some deep and convincing interpretation of the results. Frequently, these delusions are intentional and deserve to bear the name “charlatanism.”
Taleb also has a natural skepticism towards individuals who are considered successful or skilled traders:
Notice how our brain sometimes gets the arrow of causality backward. Assume that good qualities cause success; based on that assumption, even though it seems intuitively correct to think so, the fact that every intelligent, hardworking, persevering person becomes successful does not imply that every successful person is necessarily an intelligent, hardworking, persevering person (it is remarkable how such a primitive logical fallacy – affirming the consequent – can be made by otherwise very intelligent people, a point I discuss in this edition as the “two systems of reasons” problem).
There is a twist in research on success that has found its way into the bookstores under the banner of advice on: “These are the millionaires’ traits that you need to have if you want to be just like those successful people.” One of the authors of the misguided The Millionaire Next Door wrote another even more foolish book called The Millionaire Mind. He observes that in the representative cohort of more than a thousand millionaires whom he studied most did not exhibit high intelligence in their childhood and infers that it is not your endowment that makes you rich – but rather hard work. From this, one can naively infer that chance plays no part in success. My intuition is that if millionaires are close in attributes to the average population, then I would make the more disturbing interpretation that it is because luck played a part. Luck is democratic and hits everyone regardless of original skills. The author notices variations from the general population in a few traits like tenacity and hard work: another confusion of the necessary and the causal. That all millionaires were persistent, hardworking people does not make persistent hard workers become millionaires: Plenty of unsuccessful entrepreneurs were persistent, hardworking people. In a textbook case of naive empiricism, the author also looked for traits these millionaires had in common and figured out that they shared a taste for risk taking. Clearly risk taking is necessary for large success – but it is also necessary for failure. Had the author done the same study on bankrupt citizens he would certainly have found a predilection for risk taking.
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