What is Beginner’s Luck? And why you should be wary when things get off to a great start
Earlier, we learned about the association bias – the tendency to see connections where none exist. For example, regardless of how many big presentations he has nailed while wearing them, Kevin’s green polka-dot underpants are no guarantee of success.
We now come to a particularly tricky branch of the association bias: creating a (false) link with the past. Casino players know this well; they call it beginner’s luck. People who are new to a game and lose in the first few rounds are usually clever enough to fold. But whoever strikes lucky tends to keep going. Convinced of their above-average skills, these amateurs increase the stakes – but they will soon get a sobering wake-up call when the probabilities ‘normalise’.
Beginner’s luck plays an important role in the economy
Say company A buys smaller companies B, C and D one after the other. The acquisitions prove a success, and the directors believe they have a real skill for acquisitions. Buoyed by this confidence, they now buy a much larger company, E. The integration is a disaster. The merger proves too difficult to handle, the estimated synergies impossible to realise.
Objectively speaking, this was foreseeable because in the previous acquisitions everything fell perfectly into place as if guided by a magical hand, so beginner’s luck blinded them.
The same goes for the stock exchange. Driven by initial success, many investors pumped their life savings into Internet stocks in the late 1990s. Some even took out loans to capitalise on the opportunity.
However, these investors overlooked one tiny detail: their amazing profits at the time had nothing to do with their stock-picking abilities. The market was simply on an upward spiral. Even the most clueless investors won big. When the market finally turned downward, many were left facing mountains of dot-com debt.
We witnessed the same delusions during the recent U.S. housing boom. Dentists, lawyers, teachers and taxi drivers gave up their jobs to ‘flip’ houses – to buy them and resell them straight away at higher prices. The first fat profits justified their career changes, but of course these gains had nothing to do with any specific skills.
The housing bubble allowed even the most inept amateur brokers to flourish. Many investors became deeply indebted as they flipped even more and even bigger mansions. When the bubble finally burst, many were left with only a string of unsellable properties to their names.
In fact, history has no shortage of beginner’s luck: I doubt whether Napoleon or Hitler would have dared launch a campaign against the Russians without the previous victories in smaller battles to bolster them.
But how do you tell the difference between beginner’s luck and the first signs of real talent?
There is no clear rule, but these two tips may help:
First, if you are much better than others over a long period of time, you can be fairly sure that talent plays a part. (Unfortunately, though, you can never be 100%.)
Second, the more people competing, the greater the chances are that one of them will repeatedly strike lucky. Perhaps even you. If, among ten competitors, you establish yourself as a market leader over many years, you can clap yourself on the back. That’s a sure indication of talent.
But, if you are top dog among 10 million players (i.e. in the financial markets) in one particular year, you shouldn’t start visualising a Buffettesque financial empire just yet; it’s extremely likely that you have simply been very fortunate.
Watch and wait before you draw any conclusions. Beginner’s luck can be devastating, so guard against misconceptions by treating your theories as a scientist would: try to disprove them.
As soon as my first novel, Thirty-five, was ready to go, I sent it to a single publisher, where it was promptly accepted. For a moment I felt like a genius, a literary sensation. (The chance that this publisher will take on a manuscript is one in 15,000.) To test my theory, I then sent the manuscript to ten other big publishers. And I got ten rejection letters. My notion was thus disproven, bringing me swiftly back down to earth.
Survivorship Bias – WHY YOU SHOULD VISIT CEMETERIES
Self-Serving Bias – DON’T BLAME ME
Association Bias – WHY EXPERIENCE CAN DAMAGE OUR JUDGEMENT
False Causality – WHY YOU SHOULDN’T BELIEVE IN THE STORK
Illusion of Skill – THE BOAT MATTERS MORE THAN THE ROWING
The above article is from the book The Art of Thinking Clearly by Rolf Dobelli. The article is only for educational and informative purposes to explain and understand cognitive biases. It is a great book, definitely worth a read!