In many endeavors of life, there are clear ‘winners’ and ‘losers.’  This is especially true in the world of corporations and financial markets.  In most situations, we tend to favor ‘results oriented’ decisions that promote people who have generated positive returns for the organization.  However, the million dollar question associated with this mindset is how to determine if the good results are due to luck or skill.  This is especially true in situations where results can be influenced by random fluctuations in market sentiment.  It becomes especially difficult to determine the impact of skill vs. luck when the period of evaluation gets smaller.  (Quarterly Earnings, for example)

Each of us regularly pays for the services of experts.  In some cases, this is done directly by hiring a contractor or consultant.  In other cases, this is done indirectly by purchasing a mutual fund that is run by a fund manager.  (Personally, I prefer to invest in a portfolio of index funds that follow a risk appropriate asset allocation model, instead of actively managed mutual funds.  I do this because I believe that active fund management is too dependent on luck for generating returns.  Generally this results in decisions that are overly risky relative to the return potential so that the fund manager can beat the market indexes.  This type of strategy tends to work fine while the market is going up, but there is generally a large downside loss potential if the market goes into a correction.)  The key question for each of us to ask ourselves is whether we are paying for people that are skilled or people that are lucky?

Furthermore, are we placing ourselves in a position to have our success determine by skill or by luck?  To what extent does my success depend on my skill, and to what extent does it depend on luck?  The more I depend on luck for my success, the less control I will have over where my life is headed.  It is certainly true that we can’t control our luck.  However, we can control the skill that we posses once fortune smiles on us.  There are many opportunities that will come our way over the course of a career or lifetime, but those opportunities are only useful if we have the necessary skill to capitalize on them.