Before I launch into a once in a generation exposé of the economics of the healthcare industry I want to briefly jump back two weeks to the topic of luck, in the context of Gail Kelly’s run as Westpac CEO.
I got a few comments, mostly defending Ms Kelly. One in particular included a well-known quote from South African champion golfer Gary Player who quipped “It’s funny. The more I practice, the luckier I get.”
First, let’s define luck.
Luck: “a purposeless, unpredictable and uncontrollable force that shapes events favourably or unfavourably for an individual, group or cause.”
The above quote was implying that Ms Kelly worked hard; harder than her contemporaries; and enjoyed spectacular success as a result.
If I took it a step further, the implication is that after working that hard Kelly was almost entitled to that level of success.
Now, I need to make it clear firstly that I agree. If you work hard, and you are passionate about your topic due to a natural interest and thirst for knowledge and improvement, your average performance and skill level will rise over the long term.
But that’s not luck…
I want to talk about two concepts this week. First, luck and its random nature, and then mean or average performance.
There are plenty of intelligent, hard-working, passionate executives and employees around Australian and around the world who don’t end up being the CEO of a bank, at just the right time so in that CEO’s first year the benchmark gets automatically reset at a very low level, at a time when a sovereign government with a triple A credit rating decides to guarantee the bank’s funds, at a time when bad debt provisions for banks drop and continue dropping for 6 years….
Anyway, I think I covered all of that two weeks ago.
Then there’s another concept; an individual’s mean performance levels. The mean, the average, the most commonly occurring event…
An individual will have differing skill levels in every area of their lives; technical skills, communication skills, money management, athletic endeavours, intellect. And these skill levels are not equal. They differ based on, first, natural talent and then later, preference.
Natural talent possessed by an individual in any area is also a matter of luck. Luck regarding whether genetically they possess any talent, and regarding whether they have the opportunity to exploit that talent.
I’ll provide an example.
If an individual has a measured IQ of 130 or more they are deemed to be genius level. Albert Einstein had an IQ of 165. I am pretty sure everyone knows who he is…
There is a bloke in the USA, still alive mind you, called Chris Langan. Has an IQ of over 200. Routinely referred to as the smartest man in America.
Has anyone heard of him? Didn’t think so.
He does not have a college degree, has worked a number of different jobs in the construction industry and currently lives on a rural property somewhere in Missouri. No great wealth, no major theories, no scientific papers that are routinely cited.
So, natural talent is luck too, but it’s not enough.
I’ve referenced a bloke called Malcolm Gladwell before. He has a couple of interesting theories. One is the theory that 10,000 hours of dedicated practice can and does produce world-class, virtuoso performance levels, regardless of skill level. The second is that an individual doesn’t need to be the most talented, just talented enough.
There’s no question that someone in Gail Kelly’s position would have to possess above average skill levels in areas necessary to succeed in the business world. Ms Kelly also clearly enjoyed banking, was interested and passionate and worked hard, which over a long period generated world class performance.
This hard work improved Kelly’s mean or average performance levels over the course of 2 to 3 decades to the point where her mean or average performance levels were higher than the rest of the population. But as with Langan and Einstein above, not the absolute highest, but just high enough.
Then on top of that she was the beneficiary of luck, on a few occasions.
The problem is luck is unfashionable with human beings. We don’t like it and we certainly don’t like attributing success to luck. Why?
Because luck is, as defined above, purposeless, unpredictable and uncontrollable, and we are obsessed with cause and effect. Our history as a species seems to point to us being obsessed with making sense out of events that might just have been a result of a random series of coincidental events.
The attitude towards successful business people or executives or sportspeople, or anyone who has experienced extraordinary success is that they must possess Rainman-like extraordinary talents, resulting in performance levels far beyond that of the normal person on the street, and that’s why they have succeeded to that level and we have not.
It forms an easy to understand story we tell ourselves (called a narrative fallacy by the experts) that’s easier to digest than, it takes a bit of natural talent, a lot of hard work and then an extraordinary amount of luck to achieve that level of success.
Final example; Roger Federer. Arguably the greatest tennis player of all time with 17 Grand Slam tournament titles to his name…but CANNOT beat Rafael Nadal. He has won 2 of his last 12 matches against Nadal.
Federer loved his tennis and was a good athlete, but his biggest strength was his attitude and ability to play with abandon and desire to win, rather than attempting to defend and avoid a loss.
He was lucky in that from 2003 to 2007 there was an absence of any real challenger. He matched up well against all his contemporaries and dominated. His amazing forehand and speed made up for an ordinary backhand.
He seemed unbeatable and on track for 20 Grand Slam titles.
Then for some bad luck.
Along comes a skinny country kid from Spain with a monster left handed forehand whose natural direction is cross court, straight to that ordinary backhand of Federer’s. And that was it effectively. Game over. Something as simple as a left hander’s forehand and a right hander’s backhand and Nadal has dominated.
So, I guess the question is, how do you determine what is average performance and what is extraordinary performance? This is a question that needs to be asked in all walks of life. You can see how it’s an important one.
If you are thinking of attempting any challenging task you need to be honest with yourself and work out your own average skill level, and then performance level in that discipline. If the answer you get is “My average performance level isn’t high enough to succeed” then if you proceed you are effectively doing one of two things: relying on luck alone to get you across the line, or dooming yourself to likely failure.
Now, back to that concept of the mean, or average, and another theory from the world of statistics; regression to the mean.
Before you ask what the hell I’m talking about…and more importantly why, let me explain.
Sometimes performance (performance of anything; your footy team, your mate at poker, company profitability, a tennis player winning tournaments) is exceptionally good or bad over the short term, a long way away from what you think it should be.
Usually there is a good reason for that; injuries at the club; good cards; once in a generation demand for iron ore, good match ups. Summarised; good luck…or bad.
Regression to the mean says that over the long term those outlying performances will show up as rare events, with the average performance being the one that occurs most often. The long term average strips away the influence of luck and clearly illustrates what actual performance levels are or should be.
First, let’s define the mean:
Mean: “Something having a position, quality or condition midway between extremes.”
What about average?
Average: “The usual or ordinary level of quality.”
Here are a few examples of how this works.
First, poker. There actually is statistical support for the concept of beginner’s luck, as over the short term extreme events occur and result in unlikely outcomes. A weak player who doesn’t understand the odds, or even the hand hierarchy, could get lucky and win enough times to confuse luck with skill.
But over the longer term that lower average skill level takes affect and they become the ATM.
Next, stock pickers. The talking heads you see in the paper telling you what shares are a buy, hold or sell?
There have been numerous studies that show over the long term (5 years and 10 years) they perform worse than exchange indexes.
They may make some lucky guesses, and make some customers a lot of money in the process, but over the long term they are outperformed by the market.
Air Force fighter pilots? A study of Israeli Defence Force fighter pilots showed that when training, pilots would perform better following an error, and then worse following success, regardless of the praise or criticism provided.
That over time there performance reverted back to their average.
CEOs? Studies over time have shown that there is a 50/50 relationship between CEO skill and intelligence and company performance.
That one CEO may be lucky and be in charge of a firm during particularly a favourable period and is lauded for their success.
While another CEO will be criticised for failures during a period of difficult economic conditions.
Over the long term, it is debatable whether CEO skill has any impact on company performance.
I don’t provide references, which probably hurts the credibility of these Updates, but if you are interested in checking up on these studies have a look at the work of Daniel Kahnemann, Amos Tversky, Richard Thaler and Philip Tetlock.
It’s a bit unnerving thinking that over the long term you just can’t seem to escape statistical averages.
But then, I always remember the famous quip made by one of the 20th Century’s most famous economists, John Maynard Keynes, who said “In the long run we are all dead.”
So, what’s the point? If luck is unpredictable and capricious and hasn’t smiled on you yet? And the long term is too long?
Then the only option is to work on improving your own mean level of performance. Back to Gladwell’s concept of 10,000 hours of dedicated practice.
Find a discipline you are interested in and passionate about. Learn about it and continue to learn about it, and work on improving your mean skill level. Ask questions, copy those who are good, learn from mistakes, question your motives, assess your performance.
And I need to note I am specifically not referring to experience, which really can be boiled down to just having done something for a long time. Just because you have done it for a long time doesn’t make you good at it. After 10 years in Big Corporate I can attest to the fact that all that a long time in an organisation or job does is institutionalise an individual.
It fosters some traits I really dislike: close mindedness, grandiosity, arrogance, rigidity.
Sometimes experience seems to be the antithesis of innovation, where the only reason we do something a certain way is we have always done something a certain way.
If we go back to our example of Ms Kelly and her ridiculous level of luck, I will now make the point that Gail did everything within her power to improve her own mean skill level in a range of disciplines. I don’t know how this was accomplished, but it was.
So, while Gary Player’s quip is nice, memorable and supports the idea of divinely granted talent, maybe a better way to think about it is with enough talent, and enough hard work, when luck comes calling you recognise her and take up her offer of a ride.
Food for thought…