Is Success Due to Hard Work, Talent, or Luck?
25:26 Share

As a long-term investor, you need long-term insights. Use AssetCamp to look past speculative market hype and understand past performance, current trends, and model expected returns for stock and bond indexes. Markets move in cycles. Don't miss what's next. Get a seven-day free trial at AssetCamp.com. That's A-S-S-E-T-C-A-M-P dot com.

Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today's episode 408. It's titled, Is Success Due to Hard Work, Talent, or Luck? I recently had my iPhone fixed. I replaced the back of my iPhone.

the phone and they actually gave me a new phone for the back and then we used the old screen. I backed up the phone to iCloud but didn't realize that the two-factor authentication app I used wouldn't back up automatically to iCloud without giving it specific permission. That meant I was locked out of a number of websites, including our payroll company. It was a real pain because you had to upload a photo of yourself as

as well as a photo ID. There are still some accounts that I haven't restored yet just because of the headache of getting access again. Last week, Elon Musk closed on his purchase of Twitter after a legal battle to try to exit the purchase. As part of the discovery process, the Delaware's Court of Chancery released hundreds of text messages and emails sent to and from Musk.

Charlie Worzel in The Atlantic wrote, the 151-page redacted document is a rare, unvarnished glimpse into the overlapping worlds of Silicon Valley, media, and politics. I didn't spend much time on the document, but I did look at it and

and was amused that the stream of messages that began last January has Musk working with one of his associates to get two-factor authentication turned off on Twitter so he can access it. Apparently, he couldn't access it or was having difficulty with a new phone. Didn't have the passcode to turn off two-factor authentication. Basically had the same issue I did. Now, I'm clearly not as talented as Elon Musk, but I admit...

I found it ironic that here's the world's wealthiest man with a net worth of over $200 billion. And yet the details of his day-to-day life, trying to get two-factor authentication turned off. He even offered to do a FaceTime with Twitter so they could see that it was really him, so they could give him access.

I recently read an academic paper where they quoted a report that the eight wealthiest men in the world own the same wealth as the 3.6 billion people who make up the poorest half of the global population. Wealth?

follows a power law distribution, also known as a Pareto distribution, based on the economist that developed it. It's known as the 80-20 rule, where, for example, 20% of a business's clients generate 80% of the profits. With a Pareto distribution, the average isn't very meaningful because a small percentage has

has the bulk of whatever we're measuring in the case of wealth. The average wealth across the world is brought up significantly higher because of the wealth of Musk and other billionaires. The median, the middle, then, ends up being much less than the average.

In a recent academic paper that I'll refer to several times in this show, it was written by Alessandro Pluccino, Alessio Emanuele Biondo, and Alessandro

Andrea Rapisarda, three Italian academics. It's titled Talent Versus Luck, The Role of Randomness in Success and Failure. They write, if one considers the individual wealth as a proxy of success, one could argue that it's deeply asymmetric and unequal distribution among people. In other words, the top eight billionaires have more wealth than half the world's population. That's either a consequence of their natural differences in talent,

skill, competence, intelligence, ability, or a measure of their willfulness, hard work, or determination. Is that what it is? Are some people so much more successful because they're just incredibly more talented or intelligent or hardworking? In the paper, though, they point out that human qualities, though, are normally distributed.

The average IQ is 100. Nobody has an IQ of 1,000 or 10,000. We all have the same 24 hours per day. Nobody works a billion times more hours than anybody else. And yet, some individuals are much more successful, incredibly more successful.

A few weeks ago, I was in New York City visiting with my sisters. We all flew in. And a few of my sisters, we were walking on Orchard Street in Chinatown. There was a small store there which I hadn't seen. Bright Yellow by Susan Alexandra. She makes jewelry, wallets, and purses in bright colored beads. They're super bright, super sparkly. I couldn't resist. I ended up buying...

a card holder, and a little watermelon slice made out of plastic beads held together by string. Alexandra grew up in Columbus, which she points out was not a fashion capital, and she got a subscription from her aunt to Vogue when she was seven and thought, this is not real, this is magic. The ball gowns, jewelry, and the decadence, and the articles about restaurants and food and travel I never even knew existed. When she was 12, when

One of her mom's friends made beaded jewelry. And so Susan Alexander agreed to help after school. She said it didn't matter what she got paid. She just loved doing it. She did it while she watched television. Loved creating with her hands and the idea that you can make something from scratch.

She never planned on doing jewelry as a career, just did it for fun. But then she moved to New York back in 2009 after having gone to school in Chicago and wanted to go to New York where the magic she saw in Vogue existed. Her first job, she said it was doing styling shoots, was just exhausting. She felt depleted at the end of the day, just not happy. But

But then she started working with a jewelry designer named Jill Platner and started taking metalwork classes in her free time. She liked it, but she says, I was really bad at it. I would make really messy looking jewelry. Unwearable, it was so messy. And because metalwork is so precise, she started covering up the lines with an enamel, loved how colorful it was, and then started making jewelry. The jewelry she makes now. I put up a website, she said, for friends in case they were interested.

My first pieces were rings and bracelets. Henry Bendell reached out to me and were like, we want to carry your collection. And I think I cried because it was such a dream. That's how it started. It was really by chance.

There are well over 5,000 listings for beaded jewelry on Etsy, some from very talented designers, but only a very small percentage have been successful enough to do it full-time, to make a business out of it, to have a retail store. Susan Alexandra is 100,000, 10,000 times more successful than other beaded jewelry makers. She's talented, absolutely.

Absolutely. Works incredibly hard. She has 10 women that work with her that make purses. They're all mothers, she says, that work from home. But there was also an element of chance. Her jewelry was discovered and discovered by others because it was good, but also there was a viral effect, a network effect.

I looked at a series of papers that showed how randomness can impact the results. One paper looked at scientific careers and found that their highest impact work was randomly distributed, that it could have been their first publication, it could have been mid-career, or their last publication. There wasn't any real way to determine which would have the greatest impact.

Another paper looked at the top 35 U.S. economics departments. They found that faculty that had earlier surname initials in alphabetical order, those that had a last name that began with A, B, C, D, those early initials, they were more likely to receive tenure at the top 10 economics departments, significantly more likely to be fellows of the econometric society.

and to a lesser extent, were more likely to receive the Clark Medal and the Nobel Prize. It was statistically significant. When they looked and did a similar study for U.S. psychology departments, they found that having an early letter in the alphabet for your last name, first initial, didn't make a difference whether you got tenure. They determined that it was probably because within the economics field, when co-authors of a paper are listed, it's done in alphabetical order.

Those early names got more exposure and ultimately more recognition, even though they weren't necessarily more talented, they just had an early last name. Another study looked at students trying to get into oversubscribed universities in the Czech Republic.

They found there, individuals that had last names earlier in the alphabet were more likely to get in because, as part of the admissions process, prospective students were listed out in alphabetical order.

Another study in Germany found that Germans that had more noble-sounding names, like Kaiser, which means emperor, or First, which means prince, they were more likely to hold managerial positions in Germany versus those that had last names, such as Koch for cook or Bauer for farmer or Becker for baker. Success had nothing to do with talent or hard work. Well, something to do with it, but there were these random factors.

your last name. Did it begin with an A or a Z? Or even the month you were born. Another paper found that the number of CEOs born in June or July was disproportionately small relative to the number of CEOs born in other months. Often because if you're born in June or July in the U.S., you're kind of on the bubble whether you're going to delay kindergarten a year

or go, but often they were the youngest in the class growing up, and that had an impact on the longer-term career.

So when we look then back at this paper on talent versus luck by the three Italian academics, they did a fascinating study to show that there, yeah, there is a degree of randomness in success. They used what's known as an agent-based statistical approach. They ran a simulation based on to simulate a 40-year career in six-month increments.

And they had basically these dots on a board. And the dots, everybody started with the same amount of capital, but they had different levels of talent. And then there were these red and green random dots that flowed around the simulation. And if an individual came across a green dot, that was a lucky event. So the amount of capital that they had doubled proportionally.

proportional to the amount of talent they had. So if they had more talent, they actually got more capital when something good happened. If they had less talent and something good happened, they came across a lucky event, they got less capital. When anyone came across an unlucky event, their capital was cut in half. It wasn't proportional to their talent with the idea that if you're unlucky, talent doesn't really impact it. If you get in a car accident or something happens. But if something lucky happens and someone

You're more talented. Often you can take advantage of that opportunity and create more wealth. They ran this simulation and what they found is four individuals had more than 500 units of capital and the top 20 most successful held 44% of the capital at the end of the simulation. So it followed the Pareto principle. It was a power law, an 80-20 rule. 20% of the population owned 80% of the capital.

But what was even more fascinating was the most successful individuals with the most capital at the end of the simulation weren't the most talented. The moderately gifted had 128 times greater capital and success than those that were more talented just through a simulation because they

of lucky events that the luck, the randomness, had a greater impact than the talent. Now, that's just one simulation, but something similar occurs in the world. But we often don't recognize it because we fall into what Nassim Nicholas Taleb called the narrative fallacy, where we look at past events and we form connections. It's also known as a hindsight bias.

And we just don't recognize the randomness that led to the result, that we think it was just the skill. And we'd have such a strong bias to weaving a narrative and connecting the dots that it's easy to come to the conclusion it was just skill or hard work. But if you ask most successful people, such as Susan Alexander, she'll say that she worked hard, was talented. But

But there was an element of chance. Her jewelry was discovered by Henry Bendel, and it was put into one of the major stores in New York at the time for fashion. Before we continue, let me pause and share some words from this week's sponsors.

As many of you know, I used to be an institutional investment advisor. I advised clients like the Texas A&M University System, the Sierra Club Foundation, and others strategizing investments across billions of dollars. To help, I had access to top-tier tools and information, which was crucial for making smart investment decisions.

Since starting this podcast, however, I've been frustrated that the same tools I relied on aren't available to you, even though personal investing requires just as much thought and trust as institutional investing, maybe even more since it's your own money. That's why I created Asset Camp. Asset Camp's tools and insights puts you at the forefront of investing, allowing you to make informed decisions using stock and bond data that was once only available to institutional insiders for tens of thousands of dollars per year.

AssetCamp is not a stock picking tool. It's

asset-focused research built on the same methods used to grow and manage leading endowments and investment funds worldwide. AssetCamp helps you easily understand what drove past returns for the stock and bond markets, laying the foundation for your next move. With AssetCamp's powerful charts and tables, you can easily identify potential opportunities and risks. You can also confidently navigate the future by modeling expected stock and bond market returns and stress testing all your decisions.

AssetCamp also teaches you expert investing tactics in a monthly user webinar, including an open Q&A portion where I answer your investing questions. I invite you to try AssetCamp free for seven days at AssetCamp.com. That's seven days free access to the world's only asset-focused research tool built specifically for individuals like us. Try it free at AssetCamp.com.

Luck can also play a role in investing. Past performance of investment managers.

have an element of luck in them. And it can be a really long time if just based on performance to distinguish, is that manager lucky or were they skilled? When we started our asset management product back in 2003, this was based on some work I did. It was an active asset allocation product using mostly ETFs.

We were overweight based on the valuation work that we did at the time. We were overweight small cap, overweight value, and overweight emerging markets. And we had an incredible first four years. Significantly outperformed our benchmark. And I remember after four years saying to my partners that it's just not always going to be like this. Yes, we overweighted the more attractively valued assets.

asset classes and benefited from that relative to the overall market. But it didn't have to be four years of value doing better, small cap in emerging markets. They could have gotten more cheap for several years.

harming performance. But because performance did very well those first four years, we were able to attract a large number of clients and assets to this strategy. And that is one of the contributors that I could leave that role in 2012 and ultimately start money for the rest of us. Four years of performance that happened to be very, very good. Chris Woodock, who's the chief product officer at Essentia Analytics, said,

Performance is a noisy statistic. It is a function of luck and skill. And the luck part is big. Right now, managers show allocators the outcome, a performance track record, and then everybody tries to reverse engineer it to see what happened, to see if it was skill or luck. But it can be very difficult to do if it was just based on performance. And that's why Essentia did a research project. They actually have asset managers as clients, and they analyzed statistics

76 managers. They were anonymous and they looked at a 36-month period, looked at every single trade that they made, and then ranked them based on their performance but also their decision quality. They focused on seven key decision types. Stock picking, entry timing, the sizing, the scaling in a position, and the

adjusting the size, scaling out, and their exit timing. And they were trying to see whether they added value in that decision process. Claire Flynn Levi, who's the CEO and founder of Essentia, said...

A good decision is one that produces a more positive outcome, on average, than would have been achieved by chance. If an investor consistently makes more good decisions than bad, and their good decisions consistently add more value than their bad decisions destroy, then over time this investor should perform better than someone for whom this is not the case.

Whatever the influence of luck on their historical returns, this manager has shown evidence of possessing true skills. But their qualitative factors, and as concerned,

consultants, advisors at my old firm, FEG, we try to look at and analyze those qualitative factors to deduce whether they're skilled. And that's what this particular study did. Here's what's fascinating about it. Only 18% of the firms actually had a positive hit rate. They were skilled and added value. 18% of the 76 asset managers that were clients of

of Essentia. The most right managers, the most successful were only right about 55% of the time. But when they were right, then they were successful. When the managers were successful, they were able to add more value by getting right decisions than they lost when they got them wrong. But here's the other thing. Three-fourths of the managers destroyed value when they were selling, scaling out of positions.

They found, and this is consistent with the conversation we had a few weeks ago with Annie Duke about sell discipline. Most managers lose more when they underperform. It's often due to when they sell or what they sell.

how they sell. Managers are very good at buying, finding opportunities, but it's the other decisions to make. And these were all long-only stock managers trying to add value through individual stock selection. And those that actually did add value, the 18%, it was due to stock selection. But most of the professionals didn't add value, which is why we as investors should primarily focus on passive index funds and ETFs.

So we don't have to be selecting active managers. But there are areas where active managers do very well.

Camden and I recently interviewed Asha Mehta, who is the founder of a firm that invests in emerging markets and frontier markets. She's a quantitative manager, doesn't have a mutual fund or ETF, but we discussed how there are opportunities in the small to mid-cap space in emerging and frontier markets. And so I'm looking for a quant manager in that space, beginning my research. We'll look at the performance, but hopefully can look at some qualitative criteria to

to see that there is value to be added there. In some ways, it's a loser's game trying to identify outperforming managers. And to be frank, we found it very, very challenging as professional allocators to select outperforming managers, which is why we indexed much of the portfolio, particularly large cap, and in terms of the discretionary product, asset management product that I manage, we used ETFs mostly, and then allocated ETFs

adjusted the allocation based on market conditions. There was a philosopher named Boethius who was born in Rome around 480 AD. And right before he died, he was cast into prison. He wrote a book called Consolation of Philosophy, where he has an imaginary discussion between himself and a woman named Philosophy. He talked about randomness and luck.

and wrote, if chance be defined as a result produced by a random movement without any link or causal connection, I roundly affirm that there is no such thing as chance at all.

In other words, there has to be somebody doing something that leads to that chance encounter. Someone from Henry Bedell was looking for a jewelry maker and happened across Susan Alexandra's work. They both were doing something. They were taking action. And then there was a connection. There was a network impact that led to chance, that happy accident.

Boethius gives the example of someone out digging in their fields, and they come across some gold coins. Boethius points out that someone buried the gold coins, not expecting anyone to find them, and the farmer wasn't looking for gold coins, just happened to come upon them. It happened by coincidence, Boethius points out. He concludes we may then define chance as being an unexpected result flowing from a concurrence of causes where the several factors had some definite end.

People were doing something. Actions were taken and it led to some fortuitous events and meetings that weren't expected.

So in conclusion then, what do we do if we live in a world where there is randomness and some luck that can influence our career success? Well, certainly we can work hard. It's important to work hard. We can be prepared for both lucky and unlucky events. For the unlucky events, we can have a buffer, safety nets. If we have insurance, we get into a car accident, we're protected. We have life insurance if we unexpectedly pass.

That's why Policy Genius is a longtime sponsor of the show.

So we want to protect ourselves from the downside, unlucky events, but also be prepared for the unexpected opportunities that arise by having skills to take advantage of those opportunities, a diversity of skills. We have the education. We have a body of work to fall back on. If our work gets discovered, maybe one of our videos goes viral if we're on YouTube or TikTok. Ideally, we have other videos that people can watch.

Or other writings, just like the scientists. They didn't know which paper would have the biggest impact. Somewhere along the career, but they had a body of work. And one of them randomly ended up being the most successful.

Finally, then we need to recognize that it isn't all talent and it isn't all hard work. There will be some luck involved. So have a buffer, a cushion, some protection, margin of safety for the unlucky downside and continue to build our skills and work hard. Take advantage of opportunities, but recognize that we probably will not be super, super successful. We're not going to be the next Elon Musk.

Because there is a degree of randomness to who that is. There are super talented people as talented as Elon Musk that haven't had the lucky breaks or didn't take advantage of the lucky opportunities that came their way. It's a combination. Luck happens, but we have to take advantage of it when it does and be prepared for it. And Elon Musk has definitely done that. And I'm not an Elon Musk expert. Maybe he is the rare individual that has had no luck.

And it's just super, super skilled. But the mathematics argue against it because intelligence is normally distributed. Hard work is generally normally distributed. But success, incredible success, billionaire-like success, that follows a power law, which suggests there's something else there that leads to that incredible success. And one of those elements is luck.

And there's certainly the whole network effect as we're able to connect more and more and we're more aware of who's successful. And we want to listen or watch whatever they produce, if it's in the entertainment field, or whatever they happen to make, if they're in the art or even if they're in the automotive field. And that leads to some momentum for that person and that product. And that leads to incredible power law type success.

That then is episode 408. Thanks for listening. I have enjoyed teaching you about investing on this podcast for over eight years now, but I also love to write. There's a benefit to writing over podcasting, and that's why I write a weekly email newsletter called The Insider's Guide.

In that newsletter, I can share charts, graphs, and other materials that can help you better understand investing. It's some of the best writing I do each week. I spend a couple of hours on that newsletter each week trying to make it helpful to you. If you're not on that list, please subscribe. Go to moneyfortherestofus.com to subscribe to the free Insider's Guide weekly newsletter.

Everything I've shared with you in this episode has been for general education. I've not considered your specific situation. I've not provided investment advice. This is simply general education on money, investing in the economy. Have a great week.