The Success Equation. Michael J. Mauboussin

an investment bank that was hot at the time, came on campus to recruit students for a new training program. My interview went well enough that I was called to the firm's headquarters in New York City. I put on my best suit and tie, polished my shoes, and headed to the Big Apple.

      Early the next morning, we candidates gathered in a vast conference room and listened intently as the leader of the program told us what to expect for the day. “You will have full interviews with six members of our staff,” she informed us, “and then each of you will have ten minutes with the senior executive in charge of our division.” When it was clear that she had everyone's attention, she added, “If you want the job, you'll have to shine in that interview.”

      My half dozen interviews went as well as could be expected. When they were over, a member of the staff led me down a long corridor to an office paneled in dark wood, with deep wall-to-wall carpeting and a picture window overlooking a panorama of downtown Manhattan. A sharp-eyed administrative assistant ushered me in, and the senior executive greeted me warmly. Then I saw it.

      Peeking out from underneath a huge desk was a trash can bearing the logo of the Washington Redskins, a professional football team. As a sports fan who had just spent four years in Washington, D.C., and had attended a game or two, I complimented the executive on his taste in trash cans. He beamed, and that led to a ten-minute interview that stretched to fifteen minutes, during which I listened and nodded intently as he talked about sports, his time in Washington, and the virtues of athletics. His response to my opening was purely emotional. Our discussion was not intellectual. It was about a shared passion.

      I got the job. My experience in the training program at Drexel Burnham was critical in setting the trajectory of my career. But after a few months in the program, one of the leaders couldn't resist pulling me aside. “Just to let you know,” he whispered, “on balance, the six interviewers voted against hiring you.” I was stunned. How could I have gotten the job? He went on: “But the head guy overrode their assessment and insisted we bring you in. I don't know what you said to him, but it sure worked.” My career was launched by a trash can. That was pure luck, and I wouldn't be writing this if I hadn't benefited from it.

      The Boundaries of Skill and Luck

      Much of what we experience in life results from a combination of skill and luck. A basketball player's shot before the final buzzer bounces out of the basket and his team loses the national championship. A pharmaceutical company develops a drug for hypertension that ends up as a blockbuster seller for erectile dysfunction. An investor earns a windfall when he buys the stock of a company shortly before it gets acquired at a premium. Different levels of skill and of good and bad luck are the realities that shape our lives. And yet we aren't very good at distinguishing the two.

      Part of the reason is that few of us are well versed in statistics. But psychology exerts the most profound influence on our failure to identify what is due to skill and what is just luck. The mechanisms that our minds use to make sense of the world are not well suited to accounting for the relative roles that skill and luck play in the events we see taking shape around us. Let me start with some examples that are clearly controlled by either luck or skill.

      The drawing for Powerball, a multistate lottery, went off uneventfully on the evening of Wednesday, March 30, 2005. The first five balls came through the clear tubes: 28, 39, 22, 32, 33. The final ball, which came from a separate machine, clicked into place: 42. The whole process took less than a minute.

      Sue Dooley, the staff member who was overseeing the drawing that night, rolled the machines back into the vault and drove from the television studio to the Powerball headquarters five miles away. Based on the statistics, she expected that perhaps one ticket would take home that day's jackpot of $84 million and that three or four people would have picked five of the six numbers correctly, winning second place.

      She turned on her computer and waited for the states to report their results. The trickle of winners she had expected was actually a torrent. In total, there were 110 second-place winners. The statisticians employed by Powerball had warned that six or seven times the predicted figure was well within the realm of chance, but an outcome nearly thirty times the expectation appeared statistically impossible. Another oddity was that nearly all of the winning tickets had the same sixth number, 40. Truth be told, the officials at Powerball would have preferred it if the winners had picked all six numbers correctly, because the jackpot is split evenly among them. No matter how many people win, it costs Powerball the same amount. But each winner of the second prize receives a set amount, which meant that in this case, Powerball had to pay out $19 million more than it had anticipated.

      Dooley called her boss and together they puzzled over possible explanations, including numbers shown on television, pattern plays, lottery columns, and even fraud. None of them checked out. The next morning, they got their first inkling of what had happened. When a staff member at a prize office in Tennessee asked a winner where he had gotten his numbers, he answered, “From a fortune cookie.” Later a winner in Idaho said the same thing, and shortly thereafter winners in Minnesota and Wisconsin echoed the reply. Jennifer 8. Lee, a reporter from the New York Times, jumped on the story and traced the fortune cookies with the winning numbers back to the factory of Wonton Food in Long Island City, New York. Derrick Wong, a vice president at the company, explained that they had put numbers in a bowl and randomly picked out six of them. Since generating the number sequences takes time, the company printed the same numbers on different fortunes so as to save labor on the 4 million cookies the factory produced each day.¹ Each of those very lucky winners took home between $100,000 and $500,000, according to how much they had bet.

      Marion Tinsley won a lot, too, but it wasn't because he was lucky. Tinsley was known as the greatest player of checkers (also known as draughts) in the world. In 1948 he was crowned as the United States champion; shortly before his death in 1994, he tied Don Lafferty and a computer program named Chinook for first place. In the intervening forty-five years, Tinsley lost only seven individual games for a near-perfect record. In two of those games he was defeated by Chinook. Despite the fact that he didn't play for long periods of time (he was a professor of mathematics at Florida State and Florida A&M Universities), he reigned as world champion in three separate decades.²

      Tinsley's success resulted from years of deliberate practice. In his youth, Tinsley spent eight hours a day, five days a week, studying checkers, and he continued to study the game, though less intensely, throughout his life. He cultivated a prodigious memory that allowed him to recall the flow of games he had played decades earlier. Tinsley was fiercely competitive and claimed that he could beat all comers, man or machine, as long as his health didn't fail him.³

      The Sources of Success

      Both those who won the Powerball lottery and Marion Tinsley enjoyed great success. But it's easy to see that the causes of the two types of success differed markedly. The lottery outcome that day was a matter of pure good luck for the 110 winners and pure bad luck for Powerball. But Tinsley's success was almost entirely the result of skill. With all the luck in the world, you would have almost no chance of winning if Tinsley were across the table from you. For practical purposes, we can regard Tinsley's success as all skill. Unfortunately, most things in life and business are not that clear. Most of the successes and failures we see are a combination of skill and luck that can prove maddeningly difficult to tease apart.

      The purpose of this book is to show you how you can understand the relative contributions of skill and luck and how to use that understanding in interpreting past results as well as making better decisions in the future. Ultimately, untangling skill and luck helps with the challenging task of prediction, and better predictions lead to greater success.

      Skill, Luck, and Prediction

      Shortly after winning the Nobel Prize in Economics in 2002, Daniel Kahneman, a retired professor of psychology at Princeton, was asked which of his 130-plus academic papers was his all-time favorite.⁴ He chose “On the Psychology of Prediction,” a paper he cowrote with the late Amos Tversky that was published in Psychological Review in 1973. The paper argues that intuitive judgments are often unreliable because people base predictions on how well an event seems to fit a story. They fail to consider either how reliable the story is or