15 Mental Models I Keep Coming Back To : 2 of 15
2 of 15
Here is Part 2 of a series where I talk about fifteen mental models. Let’s get to it.
Success = Luck + Skill
Now I know what you’re thinking. “Thanks, Dhruv. I could be watching The Summer I turned pretty, but instead I opened your newsletter and you’re telling me that success involves both skill and luck. Groundbreaking”.
I realize that sounds obvious, but stay with me for a second.
The interesting question isn’t whether success contains skill and luck. Of course it does. The real question, the one Michael Mauboussin highlights in The Success Equation, is how much of each is at play in the game you’re playing.
Because the ratio changes everything.
Take chess. Stable rules. Minimal randomness. Immediate feedback. Over time, the better player wins. Improvement is visible. Practice compounds. If you lose, it is not because the board had a bad day.
Long term investing sits somewhere in the middle. Skill matters. Temperament, discipline, cost control, asset allocation. Over decades, good process tends to show up. But even there, luck still whispers. When you were born. What cycle you hit. Whether your prime earning years coincide with a roaring bull market or a lost decade.
Now contrast that with short term trading. Shrink the timeframe and noise explodes. A good year might reflect skill. It might also reflect favorable conditions. Over short stretches, luck can dominate so thoroughly that it is almost indistinguishable from talent.
And then there are games like roulette at a casino. Here, the math is structural. The house edge is baked in. You can get lucky on a given night. But skill is mostly absent.
Taleb makes a related point in Fooled by Randomness. Imagine a thousand parallel universes. In each one, the same person becomes a dentist. The outcomes across those universes would not vary wildly. Some differences, sure. Location. Reputation. Financial decisions. Minor execution. But you would not see enormous dispersion outside a few edge cases. The distribution is tight. You are unlikely to see billionaires at one end and abject poverty at the other.
Run that same thought experiment with a trader and the spread gets violent. In some universes they compound brilliantly. In others, a bad sequence ends the game early. Same person. Same intelligence. Different randomness. Here, you are far more likely to see both the billionaires and the bankrupt.
That is the point.
Some domains compress luck. Others amplify it.
So what are some implications?
First, know the game you’re in. If you don’t, you’ll misread your own results spectacularly. In luck heavy fields, a hot streak might make you feel brilliant, a slump might make you feel doomed, and the truth is usually somewhere in between, probably closer to “meh.” Before upgrading your ego or downgrading your self worth, just ask how wide the range of possible outcomes really is.
Second, try things. A lot of them. If luck exists, and it does, you only encounter it by participating. You cannot get lucky standing still. You have to put yourself in situations where positive variance can find you. Write the piece. Start the side project. DM Ana de Armas. Most attempts will not explode into fireworks. A few might. But zero attempts guarantees zero luck.
Third, keep a record. Even when things work out, luck has a way of quietly editing itself out of the story. You remember the win, not the flukes that came before it. Writing down your decisions, your reasoning, your experiments, even the small messy ones, is the only way to look back and separate skill from chance. It does not make the process more glamorous, but it makes it more accurate. That’s literally the reason, I decided to create my own investing journal.
And lastly, don’t mistake billionaires for oracles. Take Bill Gates. He became one of the richest people on Earth and he was genuinely brilliant, but it wasn’t just that. He went to a high school with a computer at a time when almost no schools did. He had Paul Allen as a collaborator. And there was Kent Evans, Gates’s close friend, just as brilliant and ambitious, who died in a climbing accident before he could graduate. That is luck or bad luck shaping lives. Trying to copy what he did is tempting. It is a bit like taking swimming lessons from a fish. You will probably learn some stuff but the circumstances are very different.
This mental model changed the way I look at things. Even if it sounds obvious, it’s probably the one that sticks with me the most. Makes me feel a little less smug when I win and a little less miserable when I lose. Anyway, that’s my brain dump for today. Thanks for sticking around.
Cover Image taken from Unsplash.