Financial investment success: How much luck is needed?
How much luck do you need to be a successful investor? More than you might think, according to one senior US strategist.
Chance or luck is a vital part of every great investor's fortunes, says Michael Mauboussin, head of global financial strategies at Credit Suisse bank.
"Luck has become more important in defining outcomes today than it was a generation or two ago," he told the BBC's Business Daily programme.
It sounds counter-intuitive, because you might assume that skill is the vital ingredient.
End Quote Michael Mauboussin Credit Suisse
When we see bad outcomes we tend to associate those with a lack of skill”
However, he argues it is important to recognise the relative contributions of both skill and luck when it comes to business and investing.
While, for example, activities such as roulette are pure luck, others - as with chess - rely almost wholly on your skills.
"Knowing where you are on that continuum" allows investors to think much more effectively, Mr Mauboussin says.
People must distinguish between relative skills - "mine versus yours", as he puts it - and "how good we are absolutely".
The past few decades have witnessed an explosive growth of information which is readily available to would-be investors, which Mr Mauboussin says means "our absolute skill has never been higher".
But this flood of information means our relative skills range - the difference between the very best investor and the average investor - is now narrower than it was, he argues in new book The Success Equation.
End Quote Prof Richard Wiseman Hertfordshire University
It's about embracing uncertainty - the flexibility of saying: 'Hold on, it all could be different.'”
In investing, where both skill and luck contribute to outcomes, if the range of skills becomes narrower then by definition "that leaves more to luck", he says.
Taken to extremes, this would seem to leave little room for skilled investors such as Warren Buffett, who once famously remarked that risk "comes from not knowing what you're doing".'Life is uncertain'
Mr Mauboussin agrees that skill plays an undeniably vital role, but too often many ordinary investors get things wrong when assessing its significance.
"We have part of our brains, which neuroscientists call the interpreter, which means when we see good outcomes, we tend to associate those with good processes or skill.
"When we see bad outcomes, we tend to associate those with a lack of skill."
So, if luck or chance really does play a greater role than we might like to recognise, is there any way to load the dice, as it were - and to boost our own luck?
Yes, says Richard Wiseman, psychology professor at Hertfordshire University, who carried out his own research into behaviour patterns with 400 volunteers.
Crucially, lucky people generate their own good fortune because of the way they think and behave, he says. According to him:
- They create and notice chance opportunities
- They make "lucky" decisions based on their intuition
- Their positive expectations create self-fulfilling prophesies
- When things go wrong they have a resilient attitude
"Lucky people have a very 'let's do it' attitude, whereas unlucky people tend to go: 'I am not going to do it, because there is not enough payback.'
"Rather than being very analytical, those who are lucky grasp opportunities as they come along - they realise life is uncertain and full of chances," says Prof Wiseman.
Perhaps unsurprisingly, in personality tests unlucky people come out as more anxious than those who are lucky - and this tension interferes with our ability to notice the unexpected chances that come along.'Embracing uncertainty'
In an experiment, Prof Wiseman asked one group of volunteers to watch a dot in the centre of a computer screen. Occasionally other dots would flash up on the screen's edges. Almost all of this group saw these dots.
A second group were told they would get a large pay-off for watching the same dot. They became far more anxious; as a result more than a third of this second group missed the other dots.
The lesson? The harder you concentrate on something, the less likely you are to see other opportunities - whether in business or in life.
"It is about openness and creativity - it is quite nebulous, there aren't rules," says Prof Wiseman.
"Mood is important for enhancing your luck. When you are in a good mood or relaxed, your mind becomes more expansive.
"It's about embracing uncertainty, the flexibility of saying: 'Hold on, it all could be different.' The notion of letting go of fixity is really important."
As we increasingly live in an interconnected world that is changing radically, full of disruptive technologies, the key to being lucky is in allowing ourselves to create our own chances, he says.Superstitious nonsense?
Finally, there is the question of the role superstition can play in how lucky we are.
If you carry around a rabbit's foot or four-leaf clover with you, are you wasting your time?
Yes would seem to be the obvious answer. These totems represent our attempt to impose order on the Universe - and as such this is doomed to failure.
But a series of experiments by Cologne University suggests there is some role for superstition after all.
In tests, researchers gave some golfers balls, which they told them were "lucky", and in other tests allowed some to carry their own superstitious charms.
In both cases these players performed better than the control group.
The superstitions here seemed to boost the golfers' confidence in their own abilities, and resulting in an enhanced performance.
It is an interesting finding, but none of this necessarily means you should rely just on luck - or your lucky rabbit's foot - when it comes to picking winners from the FTSE, Dow or Nikkei.