Skill, Luck, and Imitation [Did Elon Musk get lucky?]
If you avoid extreme risks, you will be outperformed by those who take them; but take extreme risks, and your average outcomes get worse.
Published: 2022-06-18 by Luca Dellanna
Principle
If you don’t take extreme risks, even if you’re the most skilled person, you will be outperformed by someone who did. And if you take extreme risks, you will have worse average outcomes than if you didn’t (competing for the first place often means using strategies that reduce your average outcome).
A recent comment by Nassim Taleb made me reflect on extreme performers and what we can learn from them:
“Elon Musk illustrates my point: solid financial success is largely the result of skills, hard work, and wisdom. But wild success (in the far tail) is more likely to be the result of reckless betting, extreme luck, and the opposite of wisdom: folly.”
First of all, let me clarify that I agree both with Taleb (most of Musk’s wealth is due to luck) and with Musk’s fans (Musk is very skilled).
In fact, the two are not at odds: Musk is probably both very skilled and very lucky. Skill is sufficient for becoming wealthy, but given that one is wealthy, how wealthy depends a lot on luck. It’s easy to imagine that in many parallel universes, Musk is also a very successful billionaire, but with how many billions? One, twenty, a hundred? It would still be less than half of his wealth in the current universe. The difference, which makes up for much of his present fortune, must be due to luck.
Similarly, skill is sufficient for becoming rich, but becoming the richest man on Earth also requires a lot of luck. Let me justify this statement with a thought experiment. Imagine taking a thousand entrepreneurs, all with the same starting conditions (cash, connections, etc.) and only differing in skill. Then, let’s observe how their wealth evolves in a few decades. As expected, we would notice that, in general, the more skilled a person, the wealthier they became. And yet, if you took the wealthiest one amongst them, the chances that he is also the most skilled one are slim. It’s more likely that the richest person is almost as skilled as the most skilled one but considerably luckier.
My point is not about whether Musk deserves his wealth – I couldn’t care less. Instead, my point is about reproducibility. We often wish to imitate the person with the highest score assuming they are also the most skilled, whereas the most skilled person is more likely to be found among those with a high-but-not-highest score.
Note that I wrote “more likely.” There may be someone so skilled that he ends up with the highest score. But he must be that much more skilled than everyone else. Otherwise, the chances are that one of the “great-but-not-best” participants will get enough luckier than the best one to overcome the difference in skill.