PODCAST:Masters in Business
TITLE:At the Money: Investing Skill vs. Luck
DATE:2023-12-06 00:00:00
URL:
MODEL:text-davinci-002-render-sha
- Podcast Title: At the Money
- Date: December 6, 2023
- Host: Barry Ritholtz
- Guest: Michael Mauboussin, Head of Consilient Research at Morgan Stanley's Counterpoint Global Division and author of "The Success Equation: Untangling Skill and Luck in Business Sports and Investing"
Key Points: 1. Distinguishing Skill from Luck: It's often challenging to differentiate between a great investor and a lucky one, especially in a short timeframe. Short records in investing may not reveal true skill.
Definition of Skill and Luck:
- Skill: The ability to readily apply knowledge in execution and performance.
- Luck: Events that happen to an individual or organization, can be good or bad, and could have had a different outcome upon rewinding time.
Paradox of Skill: As individuals become more skilled in an activity, luck plays a more significant role in determining outcomes. This is particularly evident in fields where skill levels are uniform among participants.
Identifying Skill in Investing: To identify skill in investing, focus on the process, not just outcomes. Long streaks of success can indicate both skill and luck.
Framework for Identifying Skillful Managers: Evaluate managers based on their process, looking for a repeatable and sensible approach. Avoid managers with temporary, unexplainable success.
Self-Attribution Bias: Many individuals attribute their successes to skill and their failures to external factors, highlighting the challenge of acknowledging luck's role.
Challenges Surrounding Luck: Luck can come in independent or cumulative forms. Recognizing this distinction is important, especially in fields where past events influence future outcomes.
Becoming Luckier: Luck is often beyond one's control, but putting oneself in a position to be lucky can be a skill in itself. Luck is not something you can actively improve.
Final Thought: When evaluating a manager with a hot streak, consider whether their success is due to a purposeful, repeatable strategy or just random luck. If it seems lucky, it probably is.
Barry Ritholtz's podcast, "At the Money," explores the complexities of skill and luck in investing and other areas of life, emphasizing the importance of process and long-term evaluation when assessing skillful individuals.
