I Have No Conclusion
The author argues that in most professions, it is extremely difficult to distinguish skill from luck, except in specialized roles like market makers who have a probabilistic edge through high-volume, low-margin transactions. He recommends skepticism and reserving judgment about success or failure without additional information.
THE IDEA
I HAVE NO CONCLUSION
I am frequently asked the question “When is it truly not luck?” There are professions in randomness for which performance is low in luck, like casinos, which manage to tame randomness. In finance? Perhaps. All traders are not speculative traders: There exists a segment called market makers whose job is to derive, like bookmakers, or even like store owners, an income against a transaction. If they speculate, their dependence on the risks of such speculation remains too small compared to their overall volume. They buy at a price and sell to the public at a more favorable one, performing large numbers of transactions. Such income provides them some insulation from randomness. Such category includes floor traders on the exchanges, bank traders who “trade against order flow,” money changers in the souks of the Levant. The skills involved are sometimes rare to find: Fast thinking, alertness, a high level of energy, an ability to guess from the voice of the seller her level of nervousness; those who have them make a long career (that is, perhaps a decade). They never make it big, as their income is constrained by the number of customers, but they do well probabilistically. They are, in a way, the dentists of the profession.
Outside of this very specialized bookmaker-style profession, to be honest, I am unable to answer the question of who’s lucky or unlucky. I can tell that person A seems less lucky than person B, but the confidence in such knowledge can be so weak as to be meaningless. I prefer to remain a skeptic. People frequently misinterpret my opinion. I never said that every rich man is an idiot and every unsuccessful person unlucky, only that in absence of much additional information it is preferable to reserve one’s judgment. It is safer.
When to use it
Assessing a trader’s short-term record: examine the strategy, transaction volume, and exposures before judging how much the result shows about skill.
Evaluating a startup’s success: examine execution, customer demand, competition, and timing without assuming any one component cleanly separates skill from luck.
Deciding whether to invest in a fund based on past returns: recognize that high returns may be due to luck unless the fund’s strategy has a probabilistic edge.
FROM THEORY TO EVERYDAY LIFE
In practice
Market Makers vs. Speculative Traders
Market makers, such as floor traders or bank traders who profit from the bid-ask spread, perform many transactions with small margins, similar to bookmakers or dentists. Their income is relatively insulated from randomness because they do not depend on large speculative bets. In contrast, speculative traders take larger risks and their outcomes are heavily influenced by luck, making it difficult to assess their skill from short-term results.
A MOMENT TO REFLECT
Put it to work.
How can you determine whether someone’s success in a given field is due to skill or luck?
When evaluating a person’s performance, what additional information would you need to avoid misattributing luck as skill?
Think of a profession where randomness is minimal — what characteristics make it possible to separate skill from luck?
CONTINUE THE CONVERSATION
Source texts
- Fooled by Randomness The Hidden Role of Chance in the Markets and in Life (Nassim Nicholas Taleb)