Luck versus Skill-And Your Money

The question of luck versus skill-LVS for short-permeates much of how we view many of our activities. We see luck as random, largely unknowable, and unpredictable-except by probability theory, which is by itself arcane enough to be of no use to most.

The question of luck versus skill—LVS for short—permeates much of how we view many of our activities. We see luck as random, largely unknowable, and unpredictable—except by probability theory, which is by itself arcane enough to be of no use to most. We also turn to luck as our default ego protection for failures or unwanted outcomes. “It wasn’t me; it was just bad luck.”

Good luck is also universally seen as a perceived good event where we have minimal ability to control the outcome. Winning the lottery is the classic example. Most of us would probably stipulate that we have seen/done/had more bad luck than good in our experience. It’s continuing evidence that entropy, the tendency for things to become less organized, rules the universe and the affairs of mankind. Financial affairs most definitely included.

Skill, on the other hand, is the universally recognized, and rarer, positive attribute that implies intent and control. “I wanted to do it and I did it.” It assumes causality and mindful manipulation. Even so, the consistent, effective use of skill, at some level, is still greeted with a trace of incredulity, sometimes awe. But even a Tiger Woods doesn’t always break par and no surgeon has a 100% complication-free record (“I’m good, but that was just an unlucky case!”)

Some demonstrations of this principle are inarguable; a golfer cannot hit a 300-yard drive down the middle of the fairway by accident. Gall bladders do not remove themselves. Luck, or unpredictable, uncontrollable circumstances, such as a puff of wind on a golf ball, or an unanticipated medical event in surgery, can still affect even an otherwise controlled expression of skill.

Which brings us to money. Nowhere else is the LVS debate more heated. Naturally, those who somehow get a lot of money, or especially want to get a lot of your money, tout their skill. It’s a psychological, trust play. “I made it before, I can make it again.” Maybe.

Financial writers and academics are the spoilsports. But we are much better at despoiling the claims of the winners and the wanters than we are at proactively telling an individual how to go forward and get a lot of money, other than what no one wants to hear; work hard, save and hold.

LVS also depends upon expectations and benchmarks, personal and public. The tough part of this phenomena is the inherent variability of so much of what we attempt to do. A money manager may do “above average” in a given year and then regress back to the mean. But what if he/she has more good years than bad years? Is that trend a sign of skill or of unpredictable luck?

Skill and luck are words that often serve as stand-ins for success and failure. As such, they are largely backward-looking judgments that have a psychological function, but so far in money affairs, little helpful value going forward.

We’ve heard that “luck favors the prepared mind” and studies have shown that people perceived as “lucky,” in fact, have actually made more attempts to gain their “luck” than the “unlucky.” Every billionaire, when asked the reason for his/her success, rarely cites skill in lieu of hard work…and luck. As I often say, if you ever have a choice between smart and lucky, pick lucky.