Core magazine: The skill of using luck

21 December 2016

  • Exclusive article from Warwick Business School's magazine Core
  • WBS academic Chengwei Liu discusses the skill of using luck
  • He argues performance can be tied to circumstance
  • It may instead pay to focus on the 'second best' Dr Liu believes

Never mind that Chengwei Liu, is one of the more self-effacing academics you are ever likely to meet. He can hardly deny an element of good fortune in his success to date – after all, the role of luck and randomness in exceptional performance is exactly what he studies.

Liu has spent a number of years researching extraordinary performance in the world of business, and concluded that often luck is mistaken for skill.

Related course: Executive MBA

The latest accolade to come his way is being listed as one of the global management thinkers most likely to shape the future of how organisations are managed and led. Every two years, this Thinkers50 poll ranks and shares the best in management ideas and heavyweights Michael Porter, Clay Christensen and Peter Drucker are among previous winners.

“One common feature of the people I know on this list is that we all challenge the wisdom of some existing management gurus,” says Liu.

For example, instead of learning from “great firms” and trying to imitate the most successful people and organisations, Liu's research suggests that the more exceptional a success is, the less we can learn from them, because moving from “good to great” often requires luck by being in the right place at the right time.

“Some wisdoms now need to be modified and adapted,” says Liu, Associate Professor of Strategy and Behavioural Science at Warwick Business School.

Of course, successful people don’t like to have their success explained by luck, while audiences too seem unwilling to acknowledge the role of luck in the success of outliers. As a result, the stories of the most successful attract the most media attention.

Top dog: There was more to Bill Gates' success than his talent 

So why is the idea that exceptional performers are the most skilled flawed? Because exceptional performance often occurs in exceptional circumstances, wrote Liu in research with Jerker Denrell, Professor of Behavioural Science at Warwick Business School.

Top performers are often the luckiest people, who have benefited from rich-get-richer dynamics that boost their initial fortune, concluded their research.

Consider a college dropout who turns out to be the wealthiest person in the world. Yes, Bill Gates may be very talented, but his extreme success perhaps tells us more about how circumstances beyond his control created such an outlier.

Related article: Strike it Lucky - the role luck plays in business success

In other words, what is more exceptional in this case may not be Gates’ talent, but his circumstances. For example, Gates’ relatively privileged background enabled him to gain extra programming experience when less than 0.01 per cent of his generation then had access to computers.

He attended one of only 50 schools in the country that had a computer at the time. And his mother’s social connection with IBM’s chairman – she served alongside him on the board of a charity – enabled Gates to gain a contract from the then leading PC company, generating a lock-in effect that was crucial for establishing his software empire.

Of course, Gates is not a stupid man. His talent and effort play important roles in the Microsoft success story. But that’s not sufficient for creating such an outlier. Talent and effort were probably less important than the circumstances. He could not have been so successful without the latter. But for Liu, calling out the role played by luck is not enough.

“I realised early on that if I wanted to have a career in business schools, I had to say something more actionable and constructive,” he admits, with a laugh.

So if we can’t learn from the best, who can we learn from? It is more useful, says Liu, to draw lessons from the less exceptional performers, the second best, because their circumstances are likely to be less extreme, implying their performances are more informative and offer more evidence for skill.

There are implications for the management of talent. If not observed or moderate, the role luck in success can lead to persistent bias and inequality and Liu’s research suggests the need for policymakers to design nudges to help people resist the temptation to reward or imitate the top performers.

In research, this time with Mark de Rond, of Judge Business School, Liu points out that untangling luck and skill in the performance of others isn’t easy… but it’s necessary.

“Rewarding the highest performers can be detrimental or even dangerous because imitators are unlikely to achieve exceptional performance without luck unless they take excessive risk or cheat, which may partly explain the recurrent financial crises and scandals.”

Related article: Behavioural science finds drug for food addicts

However, the “luck bias” is very persistent. Liu’s research found that even when observers are given clear feedback and incentives to be accurate in their judgement of performers, 58 per cent of them still assumed the most successful were the most skilled when they were clearly not, mistaking luck for skill.

Liu has, for example, tried to apply his research with some financial institutions, where he believes the most successful traders may simply be the luckiest ones who took more risks than their colleagues. These traders tend to be rewarded with bonuses as a result, but in all likelihood their luck will run out.

“I seek to help HR departments identify the lucky outliers and discount their performance in evaluation,” explains Liu. “Continuing to reward high performing stars on the trading floor could lead to a dangerous risk-taking culture in the long run.

"Far better to improve your own evaluation internally, and take advantage of your competitors who will continue to systematically mistake luck for skill.”

The lucky few should understand and appreciate the role that luck has in their extreme success – Liu’s research finds, interestingly, that entrepreneurs are more willing to acknowledge the role of luck in their success than corporate managers – and with that understanding comes an obligation to those that have not.

“I do a lot of teaching on executive education courses and I’ve found it really difficult to convince some executives that luck plays an important role,” he says.

Still, there are ways to ‘get lucky’. 

“Chance favours the prepared mind,” as Louis Pasteur, the French chemist, once wrote. Good and bad luck befalls to all, but only some can maximise the return on luck. And only some organisations are able to see what others do not see, says Liu.

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He points to the bestselling book Moneyball, in which Michael Lewis documents how a stereotype of what good players should look like blinded the scouts and coaches in most Major League baseball teams to the role of luck. But as a result, one unfashionable team was able to benefit.

Around the turn of the millennium the Oakland As managed to pay less for players than their eventual contribution would suggest they were worth and then resell their best performing players toward the peak of their output.

The Oakland As recognised the tendency for extreme performances in ‘star players’ to regress to the mean in future seasons. They benefited from this trading strategy because they were better able to recognise the value of their players when buying. But they also gained because other teams paid more for these players than they might be worth when selling them. The Oakland As’ strategy led to a higher ratio of win rates relative to salary costs than other teams.

Liu calls this idea as strategizing with (others’ biases of) luck. His latest research extends this idea to other areas where biases are so systematic that they allow some others to exploit their competitors’ mistakes.

For example, when hiring talent some employers continue to be influenced by stereotypes. Successful firms tend to be overconfident and have little incentive to change recruitment strategy.

On the one hand, missing hidden gems is an invisible error – employers rarely follow up what happens to the candidates they reject. Moreover, those hired are trained and developed so they can perform competently even when they were really false positive hires.

But this can falsely boost an employer’s confidence in the stereotype hiring strategy. However, while some employers continue to suffer from such a blind spot, other smarter firms see opportunity.

Corporate law firm Clifford Chance, for example, employed a CV-blind strategy in the UK to break the Oxbridge recruitment bias. A degree from Oxford or Cambridge is so prized as ‘elite’ that many UK legal firms are over-represented by their graduates.

Related course: Distance learning MBA

Of course, many of them are competent. But inevitably some Oxbridge graduates are overrated and become disappointments due to false positive mistakes.

More importantly, firms can omit hidden gems from other universities due to false negative mistakes. Clifford Chance’s CV-blind strategy forces evaluators to judge candidates’ potential based on track records instead of using the stereotype shortcut.

In the same way, many employers have vowed to adopt a name-blind policy to fight against racism. This strategy should be even more effective for smaller firms, thinks Liu, because hiring against the negative stereotype can help them identify hidden, undervalued gems that others overlook.

There is one further lesson for companies which discover a winning way to do things differently: keep the success to yourself. The Oakland As did the opposite and let Lewis write a bestseller on its strategy. The publication of Moneyball in 2003 marked the decline of the As performances because rivals started imitating their approach. 

Chengwei Liu teaches Strategic Advantage on Distance learning MBA, Executive MBA (London) and Executive MBA. He also teaches Behavioural Sciences for the Manager on the Executive MBA and Quantitative Methods for Business on the suite of MSc Business programmes.

Jerker Denrell teaches Judgement and Decision Making on the MSc Finance and Quantitative Methods for Business on the suite of MSc Business programmes.

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