One of the benefits of knee surgery is ample time to read during recovery. Now, I’ll admit that I spent most of the first week of medical leave just entertaining myself with movies, YouTube videos, and web surfing…but today I finally finished a stimulating book, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb.
Forced to summarize its message in one or two lines, I would suggest that it teaches that we assume explainable cause and effect (especially afterward) when randomness is actually driving. Even if that is a fair distillation, it does not do justice Taleb’s book, which provides an immense amount intellectual value (while also being extremely entertaining).
Let’s say you have 1,000 employees who have an 20% (purely random) chance of being successful each year. At the end of the first year, you have 200 successful employees. Of those “winners,” at the end of your second year, you have 40 succeed again…of which 8 will be successful 3 years in a row.
You then assume that those 8 are the most skilled. You have them train others how to win too. You give them promotions and raises.
When, in reality, their 3 year postive performance was purely random. The luck of the draw.
So what? Whether by chance or by skill, the company has profited by their work.
The issue is that if you confuse luck with talent, when their lucky streak inevitably runs out, their failure can (will?) remove all their wins, plus much more. Fooled by Randomness gives enough examples of this happening that the question, “So what?,” won’t be on your lips. 🙂
Well, enough of me not providing a worthy review and summary of Taleb’s great work. Suffice it to say you should purchase it and read it. Perhaps then you can join him in this realization:
My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.
We may not be able to overcome our failings, but we can avoid some of their worst pitfalls by “[being] endowed with the rare privilege of knowing” we have them.
Image from Amazon.com