Imagine this scenario1 and see if there is something off about it:

You get a chance to meet the world champion in Russian roulette.  He has traveled across the globe, putting a gun to his own head and skillfully not shooting himself.  He’s faced hundreds of opponents from every country you can name, including the big five: America, Brazil, China, India and, of course, Russia.  Still no challenger seems to match his skill.  Time and time again, his skill surpasses those around him as his opponents drop like flies while he stands victorious around them with nothing more than the faint smell of gun powder that dispersed from his opponent’s mortal wounds.  There is no man (or woman) who dares challenge him for his title.  When you finally get to meet him, you stand in awe of the unimaginable amount of skill he possesses.

Sounds a bit ridiculous right?  Let’s try that again but this time replacing “skill” with “luck”:

You get a chance to meet the world champion in Russian roulette.  He has traveled across the globe, putting a gun to his own head and luckily not shooting himself.  He’s faced hundreds of opponents from every country you can name, including the big five: America, Brazil, China, India and, of course, Russia.  Still no challenger seems to match his luck.  Time and time again, his luck surpasses those around him as his opponents drop like flies while he stands victorious around them with nothing more than the faint smell of gun powder that dispersed from his opponent’s mortal wounds.  There is no man (or woman) who dares challenge him for his title.  When you finally get to meet him, you stand in awe of the unimaginable amount of luck he possesses.

Sound a bit better?  This story is a great illustration of why skill sometimes gets mistaken for luck.  And it’s an easy mistake to make because we usually only get to observe the outcome, not how the outcome was produced.  Let’s look at some more scenarios:

• A lucky idiot buys a lottery ticket every week and wins the lottery — twice in a row.
• A lucky amateur goes all in with a two-seven off suit and wins a premier Poker tournament.
• A lucky investor aggressively loads up on leverage and makes out like a bandit.

In all these examples, it’s easy to confuse luck and skill.  The lottery winner won twice in a row, he must have a system.  The poker amateur must have excelled at reading other players that’s why he was able to win with a two-seven off suit.  And the investor, he must have had some good insight to leverage up.  What’s not said is what would be said of these people if they did not succeed.  Probably something like this:

• A man buys a lottery ticket every week and keeps losing.
  He’s probably an ignorant fool who doesn’t understand probability.
• An amateur poker player goes all in with a two-seven off suit and loses all his money. 
  Stupid mistake, any half decent poker player doesn’t bet the farm on a terrible hand in that situation.
• An investor aggressively loads up on leverage and goes bankrupt.
  He’s a careless risk taker who never should have been using leverage in the first place.

It’s important what kind of outcome you get (because what good is any of this if you get hit by a bus?), but what’s also equally important is how you got that outcome.  Given the information you had at that time, was that the best decision you could have made — even if events unfolded differently?  It matters because most people aren’t as lucky as the hypothetical world champion in Russian roulette — most need at least a little bit of skill to succeed2.

I once commented to a friend that I seem to have “average luck”.  Looking back, I think I was mistaken, I have a great luck — just not the kind that wins raffles and lotteries.  My luck is more along the lines of having the amazing opportunities that have come up time and time again in my life.  Skill then, I suppose, is about making the most of those opportunities.

Speaking of which, there’s an opportunity to win the lottery coming up.  Better use my skill to make the most of it.  I think that’s how it works, right?

1. [1] This little story was inspired by Taleb’s analogy of Russian Roulette in Fooled By Randomness, crossed with Buffett’s hypothetical of a national coin flipping contest in The Superinvestors of Graham-and-Doddsville. [↩]
2. [2] I actually think you need some skill but also a lot of luck to succeed.  Think about it this way, if you live a stable country, have a good education and have no life threatening diseases, you’re probably luckier than more than half the people on the planet.  Factor in having a roof to live under, ample food and people who support you, you’re probably among the luckiest in the world. [↩]