How luck is underestimated by top businesses
07 September 2017
- WBS research suggests luck is underestimated in business
- Focusing on top performers is the wrong approach to learning business
- Star companies and CEOs were most probably just lucky
- Random selection of executives could gives firms a strategic advantage
Managers and stakeholders are seriously underestimating the role luck plays in the success, or failure, of a business according to a new study.
Despite their best efforts, individuals and organisations can find it difficult to predict the consequences of their initiatives according to Chengwei Liu, Associate Professor of Strategy and Behavioural Science at Warwick Business School.
“While people appreciate the role of bad luck in failures, they do not necessarily do the same when it comes to explaining success,” said Dr Liu. “Explaining this asymmetry has important implications for organisational learning, executive compensation and responsibility allocation.
“Our review suggests managers and their stakeholders tend to develop illusions that the world is more controllable and predictable than it actually is, and these illusions can entail costly errors in modern societies.
“This is the bad news. The good news is we have the conceptual tools to help us to better understand the role of luck in organisational life, and thus to counter these illusions.”
In the paper Good Night, and Good Luck: Perspectives on Luck in Management Scholarship Dr Liu and Mark de Rond, of Cambridge Judge Business School, argue bestselling books on management and case studies in business school education focusing on the top performers and how to move from ‘good to great’ are taking the wrong approach.
“Perspectives on luck suggest there are no rules for becoming the richest and luck dominates the outcome beyond a certain level, “added Dr Liu. “This implies that preaching how to move from good to great is likely to lead to disappointment or even encourage excessive risk-taking, fraud even, because exceptional performances are unlikely to be achieved otherwise.
“Instead, management research and education should focus more on less extreme performances, that is, the second best, and strive to increase learning from failures, where skill and effort matter more in determining outcomes.
“We should stop showing our students how a limited number of stars have risen to levels that others are unlikely to achieve. Rather we should present more realistic and potentially beneficial lessons, such as how people can move from incompetent to okay.”
Dr Liu reviewed 1,979 papers mentioning the term luck or chance published in six leading management journals from 1950 to 2015. The five areas of luck the research examined are: luck as attribution, luck as randomness, luck as counterfactual, luck as undeserved and luck as serendipity.
But the paper goes one step further and suggests luck may also be one possible solution to the problem of increasing social inequality: luck as a leveller.
This idea originates from the ancient Greek and Venetian Republic, known as Demarchy or Lottocracy, where political leaders were elected not by merit but selected at random.
“Random selection is particularly relevant for evaluating exceptional successes, including those of star performers in corporate life,” said Dr Liu.
“As we have seen there may only be small differences in skill among corporate stars which, in turn, would seem to imply that beyond a certain corporate level, randomly selected executives are likely to perform as well as their higher performing counterparts.
“The firm may well spend the additional resources made available from this approach for more useful applications such as research and development.”
How luck can be used to select a CEO
However Dr Liu does appreciate the difficulties such a process could bring about, including confidence in a leaders’ ability to direct their efforts in the best possible way.
“Lack of confidence in leadership might, in turn, become a self-fulfilling prophecy, causing firms to underperform,” said Dr Liu.
“Assuming that the damages resulted from overconfidence is greater than that from under-confidence, luck as a leveller can still work well. Thus, randomly selecting executives from a pool of qualified candidates is more effective than selecting the highest performers, and this is particularly effective for the highest ranked corporate positions such as CEOs.
"As counterintuitive as it sounds, applying a contrarian approach by randomly (and secretly) picking your next CEO may well give your firm a competitive edge against others."
Follow Chengwei Liu on Twitter @ChengweiLiu.
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