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The Business of Money

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The Business of Money – Assessing the Luck Factor

December 3, 2020 by Garrison R. North

“There is no such thing as luck. There is only adequate or inadequate preparation to cope with a statistical universe.”―Robert A. Heinlein

In the book, The Success Equation, by Michael Mauboussin, the author attempts to separate out luck from skill in the areas of business, sports and investing. Many of us might wince at the use of the term ‘luck’ when referring to business success in particular, but at the end of the day, it is part of the equation to some degree. So in practical terms, how can we do our best to put ‘luck on our side’ when running and managing our businesses? Here are three practical takeaways from the book:

  1. Maximize Your Chances – The more opportunities that come in front of you, the less luck will play into the equation. In the book, Mauboussin breaks down the ‘luck factor’ (by controlling for the randomness of outcomes) present in major sports. One example of a sport where luck plays a very small role is tennis, because there are so many points available throughout one match. The more chances there are to score, the narrower the distribution of outcomes is, making it more likely that the better skilled player will win often. On the other end of the spectrum is hockey, where there are far less scoring chances and therefore, a wider distribution of potential outcomes. In business, this means that we should be looking for as many ‘scoring chances’ as possible (assuming we are a ‘quality’ player!), to narrow the distribution and make the outcomes more predictable.
  2. Simplify the Game – The less factors involved in an equation, the more likely it is that skill will win out over luck. Going back to the previous analogy, think of how simple the game of tennis is. Basically, you just need to keep the ball between the lines. On the other hand, hockey involves many factors, such as a puck that can bounce in any random direction, players switching on and off the ice and playing both defense and offense. This creates more possible combinations to produce an outcome, increasing the level of randomness in the distribution. In business, the lesson here is that if you have a superior product or service, you should try to simplify the equation as much as possible to increase your chances of success. By systematizing your operations and streamlining your product or service, you can give yourself a greater chance of predicable success.
  3. Know What You Control – The final lesson is to avoid getting caught up thinking and worrying about factors that are out of your control. I think we’ve all been challenged on this one plenty of times in 2020! As this year has unfolded, the businesses I have seen maintain their success are the ones who reacted to unpredictable situations by quickly adapting their businesses to handle a new, unknown environment and maintaining that flexibility going forward. These businesses are ending up with successful years, due to their ability to affect what is in front of them, rather than getting stuck being frustrated with things out of their control. The ability to separate controllable and uncontrollable factors in an important business skill to continuously improve upon.

So maybe luck isn’t the best term to use when considering its effect on business success. I believe we can think of the factor of the unknowns more in terms of opportunity and randomness, with our goal to maximize our opportunities and decrease the randomness of our outcomes.

If you are interested in reading The Success Equation, reply to this e-mail and we will be happy to send you a copy.

 

Garry North, CFP®
Managing Partner

Filed Under: Corporate

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