Michael Mauboussin: Untangling Skill and Luck

I have long posted white papers from Michael Mauboussin. Here is his most recent piece “Untangling Skill and Luck How to Think About Outcomes–Past, Present, and Future” (PDF).

Mauboussin also happens to be in my film Broke.

Note: Shout to Pragcap.com for the find.

3 thoughts on “Michael Mauboussin: Untangling Skill and Luck

  1. Pulled this quote from his letter – made me think of the Turtle Process:

    The key, then, is to focus feedback on improving skill. This is a very difficult task in
    activities where luck plays a big role. For example, this means that in evaluating an
    analyst or a portfolio manager, it is much less important to see how she has done
    recently (whether her picks did well or her portfolio beat the benchmark) than it is to
    assess the process by which she did her job. Embracing and implementing this point of
    view is demanding. And make no mistake about it: the reason to emphasize process is
    that a good process provides the best chance for agreeable long-term outcomes.

  2. Help me out here:

    Apart from the virtue of carefully untangling statistical causes of wins in stocks (with a focus on mutual funds), it seems that Michael Mauboissin is saying that neither typical owners of capital, “investors,” nor their agents – their brokers, in effect – are putting a primary effort into actually growing capital.

    The “investors” are hoping the brokers will do it; and the brokers churn, hoping that their investors will accept excuses for modest growth, or losses, via the herd comparison of “benchmarks.”

    Am I missing something?

    Why isn’t 100 at-bats enough to measure skill – at any given point in a long season? In a sense, in an over-analyzed sport like baseball, we may still like to factor out myriad fluctuating influences on hits, which will not remain constant throughout 162 games. These could be measurable, if we had infinite instrumentation & patience (weather, injury, team morale, crowd noise, stories in the papers). The batter’s adaptable skill in coping with such changes is always a part of his ability.

    May as well call the “hidden” factors luck, though, where not readily measurable – he’s either on base or he’s not, in the given innning.

    Sort of like prices for a security, over, say, a span of 55 trading days?

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