What is Illusion of Skill?

WHAT IS ILLUSION OF SKILL AND WHY THE BOAT MATTERS MORE THAN THE ROWING 

Why are there so few serial entrepreneurs – business people 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 business person 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.

Next:
Feature-Positive Effect – WHY CHECKLISTS DECEIVE YOU

Similar Biases:
Beginner’s Luck – BE WARY WHEN THINGS GET OFF TO A GREAT START
Survivorship Bias – WHY YOU SHOULD VISIT CEMETERIES
Authority Bias – DON’T BOW TO AUTHORITY
Overconfidence Effect – WHY YOU SYSTEMATICALLY OVERESTIMATE YOUR KNOWLEDGE AND ABILITIES
Illusion of Control – YOU CONTROL LESS THAN YOU THINK
Outcome Bias – NEVER JUDGE A DECISION BY ITS OUTCOME

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Zeigarnik Effect – MISSION ACCOMPLISHED

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!