Tag: Risk Aversion

Improving Your Luck

Luck

It isn’t enough to be good. You need luck.

We tend to think that smart people make good decisions and stupid people make bad decisions and that luck plays very little role. That is until we’re one of those smart people who has a bad outcome because of luck.

You can’t ignore luck and you really can’t plan for it. Yet much of life is the combination, to varying degrees, of skill and luck. This continuum is also what makes watching sports fun. The most talented team doesn’t always win, luck plays a role.

However elusive, luck is something that we can cultivate. While we can’t control it, we can improve it. In How to Get Lucky: 13 techniques for discovering and taking advantage of life’s good breaks, Max Gunther shows us how.

It turns out that lucky people characteristically organize their lives in such a way that they are in position to experience good luck and to avoid bad luck.

Technique 1: Acknowledge The Role of Luck

When losers lose, they blame luck. When winners win, it’s because they were smart.

Via How to Get Lucky:

If you want to be a winner, you must stay keenly aware of the role luck plays in your life. When a desired outcome is brought about by luck, you must acknowledge that fact. Don’t try to tell yourself the outcome came about because you were smart. Never confuse luck with planning. If you do that, you all but guarantee that your luck, in the long run, will be bad.

When you see that luck plays a role, you’re more likely to be aware that the situation can change. You don’t expect things to continue, no that’s for the people who don’t acknowledge the role of luck because they mix up planning and luck.

Via How to Get Lucky:

The process begins when a good result occurs once or a few times. The loser studies it, ascribes it to planning, and concludes that the same planning will produce the same result in the future. And the loser loses again.

The lucky personality avoids getting trapped in that way. This isn’t to say he or she avoids taking risks. Quite the contrary, as we will see later. What it does mean is that the lucky personality, entering a situation and perceiving it to be ruled or heavily influenced by luck, deliberately stays light-footed, ready to jump this way or that as events unfold.

[…]

Planning may be more important than luck in much of what you do. The trick is to know what kind of situation you are in at any given time. Can you rely on your own or others’ planning, or will the outcome be determined by luck?

Technique 2: Find the Fast Flow

The idea here is to be where things are happening and surround yourself with a lot of people and interactions. The theory being that if you’re a hermit, nothing will ever happen.

Via How to Get Lucky:

The lucky personality gets to know everybody in sight: the rich and the poor, the famous, the humble, the sociable and even the friendless and the cranky.

When you meet these people, use these tips to quickly build rapport.

You never want to become isolated. Make contact with people and get involved. Never sit on the sidelines.

Via How to Get Lucky:

Eric Wachtel, a New York management consultant and executive recruiter, has watched literally hundreds of men and women climbing career ladders. In his observation, people who get dead-ended are very often people who allow themselves to become isolated.

… The worst thing you can do is withdraw from the network of friendships and acquaintanceships at home and at work. If you aren’t in the network, nobody is ever going to steer anything your way.”

People make things happen. Not necessarily friends, just contacts. But for this to happen people need to know what you’re trying to do – or where you want to go. Few things make us happier than helping others with lucky breaks.

In the words of Eric Wachtel, the consultant recruiter mentioned above: “It really is very pleasant to pick up the phone and say, ‘Hey, Charlie, there’s a job opening that sounds as if it might be your kind of thing.’”

Via How to Get Lucky:

Consistently lucky people are nearly always to be found in the fast flow. I never met one who was a recluse or even reclusive.

Technique 3: Risk Spooning

You have to invite things to happen. This means you have to stick your neck out.

Via How to Get Lucky:

There are two ways to be an almost sure loser in life. One is to take goofy risks; that is, risks that are out of proportion to the rewards being sought. And the other is to take no risks at all. Lucky people characteristically avoid both extremes. They cultivate the technique of taking risks in carefully measured spoonfuls.

Here is what generally happens in life. Some person sticks their neck out and the speculation pays off. They become rich and famous. Newspapers interview the person, asking them “how can we do the same thing you did?” And the newfound sage replies not that he got lucky, no, but rather that he was smart and hard working and those sorts of things. And we eat this stuff up.

In part this is because culturally we hate the gambler. Largely because we don’t like that we can’t take risks ourselves. The gambler represents what we are not. It’s this motivated reasoning that makes it easy to find ways to dislike him.

Via How to Get Lucky:

It is essential to take risks. Examine the life of any lucky man or woman, and you are all but certain to find that he or she was willing, at some point, to take a risk. Without that willingness, hardly anything interesting is likely to happen to you.

[…]

[T]he need to take risks extends into all areas of life. Falling in love, for instance. If you want to experience the joys of such a relationship, you must be willing to take the possible hurts, too. You must be willing to make an emotional commitment that has the capacity to wound you. But it is exactly like playing a lottery: If you don’t bet, you are not in position to win.

Risk — smart risk — is a key element to getting lucky. Going to the track and betting on the 99-1 payoff is just stupid.

Technique 4: Run Cutting

“Don’t push your luck.” My parents used to repeat that ancient maxim after I scored a 30-minute curfew extension and rather than be happy with that, I tried to push it longer.

Via How to Get Lucky:

As nearly all lucky people realize instinctively or learn through experience, runs of luck always end sooner than you wish. Sometimes they are long runs; much more often they are short. Since you can never tell in advance when a given run is going to end, the only sensible thing to do is preserve your gains by jumping off early in the game. Always assume the run is going to be short. Never try to ride a run to its very peak. Don’t push your luck.

The key here is to always assume that you’re in the average case.

Via How to Get Lucky:

The simplest way to illustrate this is to calculate the mathematics of probability in tossing a coin. If you toss it 1,024 times, the odds are there will be one long run in which heads comes up nine times in a row. But there will be thirty-two short runs in which heads comes up four times in a row. Which is the way to bet?

On the short runs, of course.

[…]

Always cut runs short. Sure, there will be times when you regret doing this. A run will continue without you, and you will be left enviously watching all the happy players who stayed aboard. But statistically, such gloomy outcomes are not likely to happen often.

One of the problems is that long runs of luck are available and easily recalled.

Via How to Get Lucky:

One problem is that long, high runs of luck make news and get talked about. If you go to a racetrack and have a so-so day, you will forget it quickly. But if you have one of those days when every horse runs for your benefit, you will undoubtedly bore your friends with the story for a long time. We hear more about big wins than about the vastly more common little wins. This can delude us into thinking the big wins are more attainable than they really are. We think: “Well, if all these stories are true, maybe there’s a big win waiting out there for me.”

Casinos publicize big wins that are usually the result of long runs of luck. They do this for two reasons. First, it’s a good story and we think that we can win more than we actually can. Second, it encourages people who are winning, to keep those bets riding so they can be one of the big winners. Of course, the odds are with the casino so the longer you play the more likely luck goes to odds. And the odds favor the house.

We never know how long luck will last but we do know that short runs of luck are much more common than long runs of luck.

Technique 5: Luck Selection

At what point should you “cut your losses?”

Via How to Get Lucky:

As you enter any new venture – an investment, a job, a love affair – you cannot know how it will work out. No matter how carefully you lay your plans, you cannot know how those plans will be affected by the unforeseeable and uncontrollable events that we call luck. If the luck is good, then you stay with the venture and enjoy it. But what if the luck is bad? What if the bottom drops out of the stock market? Or the seemingly limitless promise of that new job vanishes in a corporate upheaval? Or your love affair sours when a rival suddenly appears?

The lucky reaction is to wait a short time and see if the problems can be fixed or will go away, and then, if the answer is no, bail out. Cut losses short. This is what lucky people habitually do. To put it another way, they have the ability to select their own luck. Hit with bad luck, they discard it, freeing themselves to seek better luck in another venture.

The inability to cut losses is one of the traits of the born loser according to psychiatrists Stanley Block and Samuel Correnti in their book Psyche, Sex, and Stocks.

Sunk costs are hard to overcome, in part because it often involves confessing that you were wrong.

Via How to Get Lucky:

It is hard because it requires a kind of pessimism, or unsentimental realism, that doesn’t come naturally to many. What makes it still harder is that there are times when, in retrospect, you wish you hadn’t applied it.

How to Get Lucky: 13 techniques for discovering and taking advantage of life’s good breaks goes on to explore 7 other techniques to cultivate your luck.

The Scroll of the Scribes

King Solomon, thought by some to be the wisest man who ever lived, anticipated the economists concept of separating equilibria by about 3,000 years. In his most famous case, he proposed cutting a baby in half to separate the true mother and the false mother. The true mother said: “No, give him to the other woman,” whereas the claimed mother accepted the proposed deal. Not only did Solomon perceive a difference in risk preferences — he knew the true mother would not accept even a small chance of slicing the baby in half — but he anticipated that the false mother would not figure out how to pose as the true mother. The baby was placed in the true mother’s arms.

Recent archaeological discoveries have unearthed a lost scroll that detailed another separation decision by Solomon, where, once again, he uses risk to gauge preference intensity.

Judgement_of_Solomon

One day a wealthy man came to Solomon for advice. He observed: “I have two sons, X and Y. They are both fine boys, and help me administer my business. I do not spoil them, but they both receive an adequate income. Alas, the great sadness of my life is that they do not get along, and I must keep them apart so they do not quarrel. When I die, and fortunately my health is still good, one must get my business. The other will receive my worldly possessions, but alas the division will be unequal. The business is worth far more, and the burden to run it is not great. I cannot rely on either to provide an income interest to the other.

My sons are equally capable, and I love them equally. Today, knowing what the future portends, they both spend what they receive. But I know that some people receive more pleasure from consumption expenditures than do others. I would like to leave my business to the son who receives the greater pleasure. However, when I ask them, they both say their pleasure is immense. How shall I decide?”

Solomon responded. “The day after the second new moon, bring your sons to me, and we shall resolve this problem. I have but one constraint. You must let me resolve this problem, and you must remain silent as I do so.”

The man agreed and at the appointed day and time, the wealthy man and his two sons appeared before the king.

Solomon spoke to the sons. “Alas, the two of you do not get along. When your father passes from this Earth, his wish is that one of you receive his business, and the other his worldly possessions. You will then have no need for further contact with each other.

“But wonderful things do not come without sacrifice. You see before you a large jar with a scorpion and some leaves. One of you will place his hand in this jar for a period of time to risk his sting. The scorpion may not see your hand for a while. But even when seen, it will not look like his natural prey; it may be ignored. But should the scorpion sting, it will be intensely painful, and perhaps worse. I have a papyrus scroll for each of you. You will each go to a corner of the room and write down how many minutes you are willing to leave your hand in the jar to be the one who inherits the business.”

Solomon then explained how he would conduct this as a second-price auction, and the virtues of that method. The father was sad, because he did not want either son to risk the scorpion’s sting, but he got false succor from the second-price auction, thinking that it would lead to less time at risk. But most important, as promised, he remained silent.

The sons returned with their answer. X had written 2 minutes on his scroll. Y had written 30 minutes. Solomon, after looking at the responses, decreed: “The business shall go to Y upon your father’s death, because he is the son I have determined would reap greater benefits from the excess income that would offer. Moreover, Y need not place his arm within the scorpion’s bottle. That would be a deadweight loss, conceivably in the literal sense of that term. I was confident that neither of you would decipher this game. Just as I had no intention of dividing the baby in an earlier decision, I had no intention of forcing either of you to take a dreaded risk.”

Solomon continued: “Unlike judges in the democracies of future centuries, I do not have time to write down and justify my opinion. But I will explain to the court scribes the principles underlying my decision, so they may be recorded and available to future generations.“

The father failed to understand what happened but maintained his promise. When he died, Y took his business, X the worldly possessions.

Solomon’s Reasoning

King Solomon observed: “My job was to find a way to identify which of two sons would derive greater utility from a substantially increased income. I have spent many years receiving my many subjects, from rich, moderate and poor circumstances. I have struggled to perceive their levels of satisfaction. I have concluded that life in moderate or poor circumstances is much the same for all. But having riches separates men. Some are possessed of exquisite taste, and turn their riches to great consumptive pleasures, both for themselves and with their celebrations for the community. Others, alas, turn riches into little of value. They purchase ostentatiously to impress, and impress no one, not even themselves.

I label these groups connoisseurs and boors. A connoisseur benefits greatly from securing riches, and this possibility is, therefore, worth making great sacrifices for. Hardly so for the boor. My test was a simple one. Son Y showed himself to be a connoisseur by his willingness to take a substantial risk to win the business; son X gave away his boorish nature when he answered a mere two minutes.

I would like to claim originality for my method, but any fairy tale king who sent suitors into battle against dragons before they could claim his daughter’s hand understood the underlying principle: Any hopeful dragon slayer faced a 20% chance of death, with only an 80% chance of blissful marriage to the princess.

(History is written by the victors, which is why traditional accounts suggest better odds.) The fairy tale king in anticipating von Neumann and Morgenstern recognized the implicit requirement: .8U(marriage to princess) > U(status quo) – 2U(death)

Only the deeply devoted would have such a utility for marriage to the princess.”

If you’re interested in learning more about the reasoning, read the full paper.