It is wrong to think that more successful people are more skilled than less successful ones
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William Henry “Bill” Gates III, the third-richest man in the world, built one of the most famous software brands “Microsoft” from scratch. Was it his intelligence and hardwork that was responsible for the stupendous success that followed or was he just plain lucky?
“I think if we look back on our lives, most of us would find that in all our major changes of direction, there was one or more unrelated event which, if it had not happened, would have led us to a very different place in life. That ranges from meeting a future spouse by chance at a train station to Bill Gates, who would probably have been far less wealthy had it not been for several chance incidents that led to his licensing of DOS (disk operating system) to IBM, and with that, the rise of Microsoft,” says Leonard Mlodinow, a faculty at the California Institute of Technology and most recently the author of The Drunkard’s Walk - How Randomness Rules Our Lives.
Mlodinow has previously co-authored A Briefer History of Time with Stephen Hawking and is currently working on another book with Hawking titled The Grand Design.
“Since luck plays a large role in results, it is wrong to think that more successful people are more skilled than less successful ones. Talent and hard work do matter - they increase your chances of succeeding - but plenty of very talented people end up with worse results than less talented ones. The role of chance shuffles the results, ruining any deterministic forces,” says Mlodinow.
Luck had a large part to play in the success of Bill Gates and Microsoft.
As the story goes and Mlodinow recounts it in his book, in August 1990, IBM was looking for a programme called “operating system” for their “home computer.” A group of executives from IBM went to meet Gates, who was then running a very small company.
Gates told them that he couldn’t provide the operating system they wanted and directed them to a programmer called Gary Kildall at Digital Research Inc. The talks between Kildall and IBM did not work out primarily because Kildall’s wife and the company’s business manager refused to sign IBM’s non-disclosure agreement.
Around the same time, Jack Sams, an IBM employee met Gates again. As Mlodinow writes, “They both knew of another operating system that was available, a system that was available, a system that was, depending on whom you ask, based or inspired by Kildall’s. According to Sams, Gates said, “Do you want to get…[that operating system], or do you want me to?” Sams, apparently not appreciating the implications, said, “By all means, you get it.””
Sams of course did not understand the implications of his statement. Gates got the operating system for around $50,000 (or by some accounts, a little more), “made a few changes, and renamed it DOS (disk operating system). IBM, apparently with little faith in the potential of its new idea, licensed DOS from Gates for a low per-copy royalty fee, letting Gates retain the rights.” And the rest as we have seen is history. There was a lot of luck involved in the success of Gates. If Kildall had co-operated, Gates wouldn’t have come into the picture at all.
Also, if IBM had just bought the operating system itself, the situation would have been very different.
“Unfortunately, even if the achievement is purely random, as in coin flipping, people will usually look back and credit the successful individual with great skill for having accomplished it. We make many mistakes of this type, attributing skill to a person who had only luck,” says Mlodinow.
Investment professionals go through a similar lucky phase. Take the case of star fund manager Bill Miller whose Legg Mason Value Trust mutual fund beat the returns of S&P 500 Index for 15 consecutive years from 1991 to 2005. Tomes got written on his legendary investing style and various reasons got attributed to his success. But Mlodinow feels Miller was plain lucky.
“Bill Miller is an example of a person who was credited for skill but had only luck. His mutual fund beat the S&P 500 index for 15 years straight, so it looks skillful, but many theories of stock pricing show that the market is too unpredictable for such a streak to be meaningful,” says Mlodinow.
“On the other hand, a simple calculation shows that if a the few thousand mutual fund managers who were managing funds comparable to his were simply flipping coins once a year, rather than investing in the market, and if we equated getting “heads” with beating the S&P, then, after a few decades, the chances of a streak of “beating the S&P” for 15 or more years in a row would be 75%. This illustrates that a streak like his was to be expected, by chance alone, and hence does not indicate skill,” says Mlodinow.
So if it’s ultimately all about luck, shouldn’t we try to make things happen?
“People who accomplish great things have usually failed many times prior to their success, or at least had only moderate success before their really great breakthrough. As Thomas Watson of IBM said, “If you want to succeed, double your failure rate,” says Mlodinow.
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