Ironies of Luck
Paul Tudor Jones was one of the most successful traders in the world. Then he woke up one day wondering why.
“In a moment of frightening enlightenment in 1993, I knew that I really did not know exactly how and why I had made all the money that I had over the prior 17 years,” he once wrote. “That threw my confidence for a jolt.”
This is an astounding admission that should be praised, because it is so important and so rare. Paul Tudor Jones is successful because he understands risk. And he understands risk because he understands luck.
Luck is the flip side of risk. You cannot understand one without appreciating the other.
If risk is what happens when you make good decisions but end up with a bad outcome, luck is what happens when you make bad or mediocre decisions but end up with a great outcome. They both happen because the world is too complex to allow 100% of your actions dictate 100% of your outcomes. They are mirrored cousins, driven by the same thing: You are one person in a 7 billion player game, and the accidental impact of other people’s actions can be more consequential than your own.
But experiencing risk makes you recognize that some stuff is out of your control, which is accurate feedback that helps you adjust your strategy. Experiencing luck doesn’t. It generates the opposite feedback: A false feeling that you are in control, because you did something and then got the outcome you wanted. Which is terrible feedback if you’re trying to make good, repeatable long-term decisions.
In investing, a huge amount of effort goes into identifying and managing risk. But so little effort goes into doing the same for luck. Investors hire risk managers; no one wants a luck consultant. Companies are required to disclose risks in their annual reports; they’re not required to disclose lucky breaks that may have led to previous success. There are risk-adjusted returns, never luck-adjusted returns.
This is the irony of investing: Risk and luck are different sides of the same coin, but we treat one as critically important, and the other like it doesn’t exist – at least for you, when you succeed. This is partly about ego, but even more about the desire to identify patterns of what works, relishing the thought of repeating those actions to win again in the future. We love narratives that explain things, and the most comfortable narrative is, “I’m good at this and will continue to be good at it.”
Here are a few things about luck that we can learn from its cousin, risk.
Good investors attempt to quantify risk. They should do the same for luck. VCs expect about half of their investments will fail. Public market investors know there will be a 30% correction once or twice a decade. Jeff Bezos talks about Amazon’s acceptance of failed projects. Luck should be the same. Benchmark that a portion of your success was caused by luck and isn’t structurally repeatable, and you’ll better handle the reality that competitive pursuits are a continuous chain of stress and challenge.
People are good at discounting risks that threaten the continuation of their past success. They are equally good at discounting the role of luck in their past success. What’s the saying? “Like every self-made man, he worshiped his creator.” Calling someone’s past success lucky is insulting, because it undermines the effort that person put into their endeavor. But risk doesn’t care about how much effort you put into something, and neither does luck. Both just show up, unannounced, eager to humble you. The only difference is that risk humbles you as soon as it arrives, while luck humbles you down the road, once it vanishes, leaving you with only the memories you shared together. You can manage risk and luck. You can ignore risk and luck. But you can’t get rid of either.
Risk is hard to define, and means different things to different people. Luck is, too. A homeless person who wins the lottery is lucky. An American born to rich parents is lucky, too. They’re different types of luck, and the latter might be more dangerous because structural luck is harder to identify, because the person enjoying it becomes used to it. That skews their perception of how most of the world operates, which almost always comes back to bite them at some point, and is hard to accept when it does.
Experiencing risk reduces confidence when it should merely highlight reality, which can make people more conservative than they should be. Luck increases confidence without increasing ability, which also magnifies how people respond to it. Not only are you tempted to repeat the actions that brought you your lucky break. But you’ll do so with gleeful confidence and all its baggage: leverage, no room for error, and a blunted ability to respond to negative feedback when your luck runs out.
There are all kinds of quotes that belittle luck – “It wasn’t luck, it was hard work and persistence,” and whatnot. I get the temptation. But can you imagine how crazy someone would look saying the same thing about risk? “The earthquake wasn’t a risk, we just didn’t work hard enough to predict it.” Realizing that both luck and risk are an ever-present and normal part of the game makes you accept that not everything is in your control, which is the only way to identify and focus on whatever is in your control.
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It’s Hard to Predict How You’ll Respond to Risk