Michael Mauboussin: Independent vs. Cumulative Luck: How Both Influence Your Investment Journey

Johnny HopkinsMichael MauboussinLeave a Comment

During this interview with MIB, Michael Mauboussin argues that most successful investors acknowledge the role of luck in their achievements. He cites a study that found that successful mutual fund managers attributed their success to internal factors 59% of the time, while attributing poor performance to external factors 83% of the time. This highlights the self-attribution bias, where people tend to take credit for success but blame external factors for failure. Here’s an excerpt from the interview:

Mauboussin: I do think most really good investors acknowledge the role of luck, and so you know, I think if people are circumspect, they absolutely do. But I’ll just mention Barry.

There’s a new paper which I love that has a stat in there which I found to be fascinating. So they… this is a guy that used machine learning program to study the attribution of mutual fund performance.

And so they’re like, if you know, if a stock did well my portfolio, how much was internal versus external? And if it was internal, if it was a successful stock, it was fifty nine percent of the it was internal basically, right, I’m a smart guy.

For those where it was a detracting stocks, was a bad performing stock in those instances, eighty three percent external. Right.

So this is this we call the self attribution bias. When things are good, it’s because I’m smart, and when things go badly it’s because the world out there is messed up and I got unlucky.

So I do think broadly speaking, people are not good at this. Broadly speaking, people want to think of them as their successes as a function of their own skill.

But again, most people who really think it through recognize the extraordinary role of luck.

I think one aspect of luck that’s not fully appreciated is that it almost comes in two flavors.

The first flavor is sort of things that are independent, you know. And by the way, one example used is baseball hitter. You know, so if you hit over season two fifty or three hundred, like, you know, what does the streaks look like?

And so that looks really like a spinner model, almost like a coin tossing type of model, So one event is distinct from the other.

The second kind of luck is really the cumulative process, and so what happened before leads to what happens next.

And that’s really important when you think about social products like sales of books, sales of you know, popular TV show, sales of films, that type of stuff.

So this independent versus cumulative thing, I think is a really big factor that people sometimes don’t think about as clearly as they could.

Maybe the other thing I’ll say Barry, I sometimes see this that people go, you know, how do I become a luckier person?

And here are four things you need to do to become luckier doesn’t make any sense. You can’t make your own luck, right, by definition, it’s something out of your control.

Now, what you can do is put yourself in a position to have luck. Buying a lottery ticket will do that for you. It doesn’t mean you’re gonna have good luck, right, So this is the key. And putting yourself in a position to be lucky might be a skill in and of itself, right, so it’s not really luck.

So that breakdown of what’s in your control what’s not in your control, I think is a very important thing for people to bear in mind.

You can listen to the entire discussion here:

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