The Success Equation. Michael J. Mauboussin

Advocates for the legalization of online poker in the United States articulated this neat test. The law considers poker as gambling, a game of luck, and ignores the role of skill. But while luck certainly does influence who wins at poker, there should be no doubt that it is also a game of skill.¹⁵

      Most people attain an acceptable level of skill in day-to-day activities after about fifty hours of training and practice. Examples include driving a car, learning to type, or playing a sport with basic proficiency. The process of acquiring a skill follows three stages:¹⁶

       In the cognitive stage, you try to understand the activity and you make a lot of errors. You might imagine a golfer learning to hold the club, thinking about how to position her body for a swing, and swinging poorly at first. The cognitive stage is generally the shortest.

       Next comes the associative stage. In this stage, your performance improves noticeably and you make fewer errors that are more easily corrected. A golfer would make regular contact with the ball but might not have full command of the direction it goes or the distance it travels.

       Finally, there is the autonomous stage, where the skill becomes habitual and fluid. Now the golfer can adjust her swing to accommodate the wind or the downward slope and break of a putt.

      As your learning passes through these phases, there is a change in the neural pathways that the brain employs. If you become skilled in a physical or cognitive task, your body knows what to do better than your mind, and thinking too much about what you're doing can actually lead to degradation in performance. In these activities, intuition is powerful and valuable.¹⁷

      Most of us hit a plateau in our skills and are perfectly content to stay there. Once at that plateau, additional experience does not lead to improved results (as my play in a recreational hockey league attests). What distinguishes elite performers, or experts, from the rest of us is that they advance beyond their natural plateaus through deliberate practice. Unlike routine and playful performance, deliberate practice pushes people to attempt what is beyond the limits of their performance. It involves hours of concentrated and dedicated repetition. Deliberate practice also requires timely and accurate feedback, usually from a coach or teacher, in order to detect and correct errors. Deliberate practice is laborious, time-consuming, and not much fun, which is why so few people become true experts or true champions.¹⁸

      In activities where luck plays a larger role, skill boils down to a process of making decisions. Unlike a piano virtuoso, who will perform at a high level every night, an investor or a businessperson who makes a good decision may suffer unwelcome consequences in the short term because of bad luck. Skill shines through only if there are a sufficient number of decisions to weed out bad luck.

      Jeffrey Ma was one of the leaders of a notorious team of blackjack players from the Massachusetts Institute of Technology. To make money, the team counted cards. Their system had two crucial components. First, team members fanned out and counted cards at a number of different tables in order to determine which tables were attractive. In this initial phase, the players stuck to small stakes. They were playing solely to determine if the cards that remained in the shoe had a relatively large number of high cards. The more high cards, the greater the chance that the player will win a hand. When a player found an attractive table, a teammate would join him and place large bets in order to win as much money as possible. As described in Ben Mezrich's best-selling book, Bringing Down the House, the team could express the attractiveness of the table and how large the bets should be with mathematical precision.¹⁹

      Ma and his team were acutely aware of the influence that luck could have and therefore stayed focused on their decision-making process. Indeed, Ma recounts an instance when he lost $100,000 in just two rounds over the course of ten minutes, even though he played his cards just right: “The quality of the decision can be evaluated by the logic and information I used in arriving at my decision. Over time, if one makes good, quality decisions, one will generally receive better outcomes, but it takes a large sample set to prove this.”²⁰ In other words, he has to place a lot of bets in order to win, because this game involves a lot of skill but it also involves a lot of luck.

      Developing skill is hard work whether or not luck is involved. But the feedback is very different, depending on the degree to which luck plays a role. With most physical tasks, there is a high correlation between skill and results. If you work diligently at increasing your speed at typing, the number of words you can type each minute will increase and the number of errors you make will decline. With tasks that depend on luck, making proper decisions using good skill can produce poor results over the short term. To use Ma's example, whether his team won or lost was not a reliable form of feedback in assessing skill unless and until they played enough games. The lack of quality feedback wreaks psychological havoc, too, creating false doubt in skillful people who are making good decisions and creating false confidence in those who are doing well simply because they're experiencing a streak of good luck.

      In considering skill, it is also important to distinguish between experience and expertise. There is an unspoken assumption that someone doing something for a long time is an expert. In activities that depend largely on skill, though, expertise comes only through deliberate practice, and very few individuals are willing to commit the time and effort to go beyond a plateau of performance that's good enough. The fact is, most of us generally don't need performance that's better than good enough. An experienced auto mechanic, plumber, or architect, for instance, is often all you need. On the other hand, deliberate practice is essential to reach the pinnacle as a musician or an athlete.

      The confusion between experience and expertise is particularly acute in fields that are complex and where luck plays a big role. One of the signatures of expertise is an ability to make accurate predictions: an expert's model effectively ties cause to effect. By this measure, experts who deal with complex systems fare poorly.

      Philip Tetlock, a professor of psychology at the University of Pennsylvania, has done detailed research on experts in political and economic fields and found that their predictions were not much better than algorithms that crudely extrapolated past events.²¹ The record of people forecasting the behavior of a complex system, whether it's prices in the stock market, changes in population, or the evolution of a technology, is amazingly bad. Impressive titles and years of experience don't help, because the association between cause and effect is too murky. The conditions are changing constantly, and what happened before may not provide insight into what will happen next.

      Professor Gregory Northcraft, a psychologist at the University of Illinois, sums it up: “There are a lot of areas where people who have experience think they're experts, but the difference is that experts have predictive models, and people who have experience have models that aren't necessarily predictive.”²² Distinguishing between experience and expertise is critical because we all want to understand the future and are inclined to turn to seasoned professionals with good credentials to tell us what is going to happen. The value of their predictions depends largely on the mix between skill and luck in whatever activity they're discussing.

      The Luck-Skill Continuum and Three Lessons

      To visualize the mix of skill and luck we can draw a continuum. On the far right are activities that rely purely on skill and are not influenced by luck. Physical activities such as running or swimming races would be on this side, as would cognitive activities such as chess or checkers. On the far left are activities that depend on luck and involve no skill. These include the game of roulette or the lottery. Most of the interesting stuff in life happens between these extremes. To provide a sense of where some popular activities belong on this continuum, I have ranked professional sports leagues on the average results of their last five seasons (see figure 1-1).²³

FIGURE 1-1

      Sports on the luck-skill continuum (one season based on an average of the last five seasons)

      Source: Analysis by author.

      Where an activity lies on the