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THE BOAT MATTERS MORE THAN THE ROWING
Illusion of Skill
Why are there so few serial entrepreneurs – businesspeople who start successful
companies one after the other? Of course, there’s
Steve Jobs and Richard
Branson, but they represent a tiny minority. Serial entrepreneurs account for less
than one per cent of everyone who starts a company. Do they all retire to their
private yachts after the first success just like Microsoft co-founder Paul Allen did?
Surely not. True business people possess too much get-up-and-go to lie on a
beach chair for hours on end. Is it because they can’t let go and want to cosset
their firms until they turn 65? No. Most founders sell their shares within ten years.
Actually, you would assume that such self-starters who are blessed with talent, a
good personal network and a solid reputation would be well equipped to found
numerous other start-ups. So why do they stop? They didn’t stop. They just failed
at succeeding. Only one answer makes sense: luck plays a bigger role than skill
does. No businessperson likes to hear this. When I first heard about the
illusion of
skill
, my reaction was: ‘What, my success was a fluke?’ At first, it sounds a little
offensive, especially if you worked hard to get there.
Let’s take a sober look at business success. How much of it comes down to
luck, and how much is the fruit of hard work and distinct talent? The question is
easily misunderstood. Of course, little is achieved without talent, and nothing is
achieved without hard work. Unfortunately, neither skills nor toil and trouble are
the key criteria for success. They are
necessary –
but not sufficient. How do we
know this? There is a very simple test: when a person
is successful for a long
time – more than that, when they enjoy more success in the long run compared to
less qualified people – then and only then is talent the essential element. This is
not the case with company founders; otherwise,
the majority of successful
entrepreneurs would, after the first achievement, continue to found and grow
second, third and fourth start-ups.
What about corporate leaders? How important
are they to the success of a
company? Researchers determined a set of traits deemed to be associated with
‘a strong CEO’ – management procedures, strategic brilliance in the past etc.
Then they measured the relationship between these behaviours on one hand,
and the increase of the companies’ values during the reign of these CEOs on the
other hand. The result: if you compare two companies at random, in 60% of cases
the stronger CEO leads the stronger company. In 40% of the cases, the weaker
CEO leads the stronger company. This is only 10 percentage points more than no
relationship at all. Kahneman said: ‘It’s
hard to imagine that people
enthusiastically buy books written by business leaders who are, on average, only
slightly better than the norm.’ Even Warren Buffett thinks nothing of CEO
deification: ‘[?. . .?] A good managerial record [?. . .?] is far more a function of what
business boat you get into than it is of how effectively you row.’
In certain areas, skill plays no role whatsoever. In his book
Thinking
,
Fast and
Slow
, Kahneman describes his visit to an asset management company. To brief
him, they sent him a spreadsheet showing the performance of each investment
adviser over the past eight years. From this, a ranking was assigned to each:
number 1, 2, 3 and so on in descending order. This was compiled every year.
Kahneman quickly calculated the relationship between the years’ rankings.
Specifically, he calculated the correlation of the rankings between year 1 and
year 2, between year 1 and year 3, year 1 and year 4, up until year 7 and year 8.
The result: pure coincidence. Sometimes the adviser
was at the very top and
sometimes the very bottom. If an adviser had a great year, this was neither
bolstered by previous years nor carried into subsequent years.
The correlation
was zero. And yet the consultants pocketed bonuses for their performance. In
other words, the company was rewarding luck rather than skill.
In conclusion: certain people make a living from their abilities, such as pilots,
plumbers and lawyers. In other areas, skill is necessary but not critical, as with
entrepreneurs and leaders. Finally, chance is the deciding factor in a number of
fields, such as in financial markets. Here, the
illusion of skill
pervades. So: give
plumbers due respect and chuckle at successful financial jesters.
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