“Lucky …Of persons: Having, or attended by, good luck. In early use often, Fortunate, successful, prosperous. Now with narrower meaning: Favored by chance; successful through causes other than one’s own action or merit.
Luckless …Having no ‘luck’ or good fortune; attended with ill-luck; unlucky, hapless, ill-starred, unfortunate…presaging or foreboding evil, ominous of ill.
Luck …Fortune, good or ill; … a person’s condition with regard to the favourable or unfavourable character of some fortuitous events, or of the majority of the fortuitous events in which he has an interest…Also, the imagined tendency of chance (esp. in matters of gambling) to produce events continuously favourable or continuously unfavourable; the friendly or hostile disposition ascribed to chance at a particular time.”
— Oxford English Dictionary
It is said that when Napoleon interviewed candidates to become field marshals, he asked them, “Are you lucky?” Why might someone pose such a question in an interview? If you were asked that question today, how would you answer?
The question comes to mind in the context of one of the most arresting learning exercises in the history of the Darden School, “Darden’s Luckiest Student.” The brainchild of the Decision Analysis teaching faculty in the First Year of our MBA-Full Time Program, this exercise illustrates some important concepts about the effect of randomness in business life. Last Friday, five first-year students were chosen at random from their sections—the students are Jong-Uck (Max) Park, Matt Conner, Dom Dorsey, Ivo Voynov, and Noah Hirsch. At morning coffee on Monday, the field will be narrowed from five to three; the next day, the field will be narrowed from three to one; and on Wednesday, February 20th, the remaining one student will have the opportunity to select between two identical briefcases—one containing $18,750 (which she or he can keep) and the other containing no money. Just before that choice, the finalist will have a choice to accept opening one of the briefcases or instead accepting a cash offer. The cash offer will be determined by picking a ball from a case that indicates an amount in the range from $1,000 to $18,000. Last Friday, the five semi-finalists made binding choices as to their choice (the briefcase or the cash offer) for all possible cash amounts. If you find all this randomness bewildering, don’t worry. The Decision Analysis course will make sense of it all in class and later in a research paper. And it will command a great deal of attention and caffeine consumption this coming week.
It happens that the question of luck coincides with a bad moment in the capital markets. The contagion of the mortgage loan losses is spreading from the firms that invested in the loans to those firms that guaranteed the credit worthiness of the loans. The guarantors are finding that the losses vastly exceed expectations; their equity is dwindling as they meet obligations under their guarantees; reorganizations and workouts of the guarantors in distress seem imminent. But if the firms fail, investors in the then-unguaranteed collateralized debt obligations will need to announce more losses. March and April will tell us how deeply the bad luck runs.
Answering Napoleon’s question straightforwardly is problematic. As the Oxford English Dictionary suggests, to be lucky is not merely to avoid bad luck, but also to get positive results consistently. In statistical terms, to assert that you are lucky is to make a heroic assertion, that you believe in the possibility of a “hot hand.” This phrase derives from basketball, in which players sink a number of baskets in rapid succession. Unfortunately, a mass of research ((The research pretty strongly refutes the “hot hand” phenomenon, (see for instance, discussions from Caltech, Dartmouth) but some scholars do find modest evidence for the hot hand in other sports such as golf and horse shoes (see also, the comment from a scholar at Tufts). Maybe with better statistical tests and comprehensive analysis across many fields, scholars will find a consistent and durable pattern of hot hands. But I’ll wait until then to begin to make business and investment decisions based on the concept.)) suggests that results due to a supposed hot hand are no different from the results produced by chance.
Consider the other implication of “yes,” the avoidance of bad luck. You must be careful here too: Is the successful avoidance the result of chance or intention? To say “yes” implies that one is impervious to risk, like Superman. The reality is that one is always exposed to the risks you know about but cannot (or choose not to) hedge. Furthermore, one is exposed to the unknown unknowns (“unk-unks” as they are called in the aerospace industry), the stuff you simply can’t imagine. It is sheer hubris to think that one is lucky, simply because you have walked across a busy highway blindfolded, and survived. Two recent books ((See Taleb’s Fooled by Randomness (Random House, 2005), and The Black Swan (Random House, 2007).)) by Nassim Nicholas Taleb make this point elegantly. Also, Richard Bookstaber’s recent book on hedge funds describes some of the costly consequences of hubris about risk. Writing about Taleb, Malcolm Gladwell noted, “it seemed incontrovertible that if you started with nothing and ended up with billions then you had to be smarter than everyone else: Buffett was successful for a reason. Yet how could you know, Taleb wondered, whether that reason was responsible for someone’s success, or simply a rationalization invented after the fact?” Is a successful person lucky or smart? The answer is unknowable. Taleb argued that the human bias is to assume that past experience can be repeated—in this sense, humans are arrogant; they hold that they are smart enough to drive certain results. But Taleb notes that bad luck is always hovering in the vicinity.
Years ago, the Founder of our University of Virginia, Thomas Jefferson, said, “I’m a great believer in luck. I find that the harder I work, the more I have of it.” He suggests that our efforts can at least tilt the odds, away from bad luck and toward good. Many readers are living proof of our efforts (and good results) at tilting the odds: We wear seat belts, avoid smoking, eat right, follow doctor’s orders, and so on. I agree with Jefferson that we can tilt some odds in some gambles. But as Lincoln might have said, it is not possible to tilt all the odds all the time.
Back to Napoleon and job interviews: if being truly lucky is impossible and/or unknowable, why ask? What was the Emperor getting at? I suspect that Napoleon’s interview question had less to do with luck and more with other attributes of the candidates:
**Past success. What about the record of the individual should merit my attention? Even if Napoleon had read the candidate’s resume, he may have wanted to get a sense of emphasis and highlights from an oral presentation.
**Communication skill. Can the candidate convey a personal narrative well? Field marshals need a blend of coherence and charisma.
**Audacity, and determination, with which to confront the odds. Or their opposite, fatalism. Can the candidate dare to reach for the results we need? Does the candidate have the strength of character to withstand bad luck?
**Hard work that might generate success. How does the candidate describe the luck? Did it ‘just happen’? Or did the candidate try to tilt the odds in favor?
**Respect for risk. Is the candidate naive or ignorant about the odds of past gambles? Does the candidate know that bad luck is always nearby?
Napoleon was no slouch. In his early years of command, he displayed all of these attributes himself–unfortunately, even these couldn’t prevent eventual defeat. His hot hand ran out in the disastrous Russian Campaign of 1812 and ultimately in 1815 at Waterloo.
How should Darden students and alumni answer Napoleon’s question? The overwhelming majority are very lucky people—in the old definition of “Fortunate, successful, prosperous.” But even in current terms (“ Favored by chance”) they have beaten stiff odds: they got into Darden and have (or will have) embarked on fruitful careers. Their answer to Napoleon’s question could well be “yes.” The whole issue is what they say after that. Remember that the Emperor is probably less interested in past prosperity or your experience with Chance than with qualities of character, skill, and intellect. Be careful about how you continue the conversation.
Posted by Robert Bruner at 02/17/2008 11:26:09 AM