Harvard Business Review Press

      Boston, Massachusetts

      Copyright 2012 Michael J. Mauboussin

      All rights reserved

      Printed in the United States of America

      10 9 8 7 6 5 4 3 2 1

      No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to [email protected], or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

      Library of Congress Cataloging-in-Publication Data

      Mauboussin, Michael J., 1964-

      The success equation : untangling skill and luck in business, sports, and investing / Michael J. Mauboussin.

      p. cm.

      Includes bibliographical references.

      ISBN 978-1-4221-8423-3 (alk. paper)

      1. Success. 2. Success in business. 3. Ability. 4. Fortune. 5. Decision making. I. Title.

      BF637.S8M34125 2012

      650.1—dc23

      2012018975

      To Michelle

      Skill that I asked her to wed

      Luck that it was yes she said

      CONTENTS

       Acknowledgments

      Introduction Sorting the Sources of Success

      Chapter 1: Skill, Luck, and Three Easy Lessons

      Chapter 2: Why We're So Bad at Distinguishing Skill from Luck

      Chapter 3: The Luck-Skill Continuum

      Chapter 4: Placing Activities on the Luck-Skill Continuum

      Chapter 5: The Arc of Skill

      Chapter 6: The Many Shapes of Luck

      Chapter 7: What Makes for a Useful Statistic?

      Chapter 8: Building Skill

      Chapter 9: Dealing with Luck

      Chapter 10: Reversion to the Mean

      Chapter 11: The Art of Good Guesswork

       Appendix

       Notes

       Bibliography

       About the Author

      ACKNOWLEDGMENTS

      I am very grateful to have had the opportunity to learn from so many thoughtful and generous people. Writing a book is a long journey that is sometimes very difficult. I am blessed by a wonderful network of friends and associates who helped me along the way.

      My colleagues at Legg Mason Capital Management have not wavered in their support. Whereas I had to do some convincing to pursue my prior book, I was strongly encouraged to pursue The Success Equation. Particular thanks go to Jennifer Murphy, Bill Miller, and Sam Peters. LMCM's deep commitment to ongoing learning makes it a special place to be.

      A number of people graciously shared their time and knowledge with me. They pointed me to useful stories, explained points, and straightened my course when I veered off it. These include Sam Arbesman, Brian Burke, Aaron Clauset, Jerker Denrell, Paul DePodesta, Doug Erwin, John Galvin, Daniel Kahneman, Michael Raynor, Matt Salganik, David Shaywitz, Tom Tango, Phil Tetlock, Duncan Watts, David Weinberger, and Richard Zeckhauser. Tom and Duncan read specific chapters and provided valuable feedback.

      Scott E. Page has been a tremendous inspiration and source of encouragement from the beginning of this project. In particular, Scott put together a terrific conference at his home institution, the University of Michigan, in February 2011, dedicated to this theme. Scott is an amazing source of ideas and a great and generous friend.

      It's time-consuming to read the draft of a manuscript and to provide feedback to the author. I was blessed to have a great collection of folks help me out. These include Phil Birnbaum, Michelle Mauboussin, Bill Miller, Michael Persky, Sam Peters, Al Rappaport, Chris Wood, and an anonymous reviewer. I was particularly pleased to have Phil Birnbaum, one of my heroes in the sabermetrics community, take the time to share his thoughts and criticism.

      Andrew Mauboussin, my oldest son, made a very meaningful contribution to the book. He did research on a number of topics and generated all of the simulations—work that is beyond my technical ability. He also read each of the chapters and chipped in with helpful comments. I was proud to cite the research he did with Sam Arbesman. I appreciate your contribution, Andrew.

      I benefited immensely from working with Laurence Gonzales, who edited the book. Laurence is a very talented writer—Deep Survival is perhaps his best-known work—who improved the clarity and quality of the text throughout. It's valuable that he doesn't come from the same professional world as I do, because it allows him to be critical with fresh eyes. He's also an editor who is old school, which I love about him. No nouns as adjectives in this text. He's a terrific source of ideas and has taught me a great deal about writing. Thank you, Laurence.

      It's hard for me to say enough about Dan Callahan, my colleague at Legg Mason Capital Management. Dan does it all: quality research, vivid exhibits, and great editing of early drafts. And, as a former pro baseball player, he had particular interest in, and insight into, the sports material. On top of it all, he did all this while satisfying his other analytical responsibilities within the firm. Dan has also developed a bit of side expertise: using creative approaches to generating book titles. For this book, we employed a site developed by Matt Salganik called www.allourideas.org—check it out, it's cool. Dan not only coordinated the project, he contributed the winning title, The Success Equation, which beat out scores of competitors. Thanks, Dan.

      I loved working with Tim Sullivan, my editor at Harvard Business Review Press. Tim supported the idea for the book from the beginning and showed great aplomb in guiding the whole process. His ideas are sprinkled throughout the book and his edits left the proper material on the cutting room floor. I also received great assistance from others on the team at HBRP, including Erin Brown, Kevin Evers, Stephani Finks, and Jen Waring. Monica Jainschigg's sharp-eyed edits also tightened and improved the manuscript.

      My wife, Michelle, provides steadfast love, counsel, and support. She encourages me to pursue my intellectual and athletic passions, which keep me going mentally and physically. She also offered useful comments on the initial manuscript. Michelle's mother, Andrea Maloney Schara, is integral to our family's activities, maintains a commendable desire to learn, and injects some cognitive diversity into all of our lives. Finally, I thank my children, Andrew, Alex, Madeline, Isabelle, and Patrick. I'm confident that with hard work and grit, each will successfully solve the success equation in his or her own way.

      INTRODUCTION

      SORTING THE SOURCES OF SUCCESS

      MY CAREER WAS LAUNCHED by a trash can.

      Like many seniors in college, I wasn't sure what I wanted to do for a living, but I knew that I needed