Are You Lucky?
Life, Wealth and risk
Living well means you must deal effectively with the future. The future is unknown in principle. So you need a means to decide how to act in the face of randomness and uncertainty. This applies particularly to investing. In this context, “effectively” means aligning actions and performance with some set of values, goals, and desired outcomes in the face of uncertainty. Wealth is possible only because of the unknowable future. In a deterministic (i.e., risk-free) world, all opinions about futures do not matter and so any initial wealth state will evolve predictably over time. The only way to change this deterministic path is for an unknown to enter, i.e., risk. In a deterministic world, there can be no way to gain from a difference in opinion. You can never make a “bet” about anything and win. Thus, no risk means no innovation. Since we plainly see everyday life exists entirely in the face of unknown futures, and since we all must deal with such uncertainties, a natural question is: What is a wise way to deal with uncertainty/risk? Here, of course, we will engage the unknown future in the context of wealth building, investing and the markets.
Life’s unknowns and combat
To begin to place boundaries around some answers, consider military combat. (Quite a leap, but hold on!). Combat generates a huge amount of random/chaotic and deadly events. So understanding how to successfully fight in combat might reveal clues about uncertainties as simple as financial risk! It is instructive to note that at this extreme of acting in the face of uncertainty, military leaders are unanimous in the understanding that training of a certain type substantially improves the odds of not only surviving combat, but of emerging victorious. Thus, the military has a strong understanding of successfully facing uncertainty and winning. What is the relationship between the training for combat and training for life, or just investing? The first thing we can say with reasonable confidence is that one’s attitude really matters!
The 4 luck Principles [ 1 ]
In the fields of observation, chance favors only the mind that is prepared.”– Louis Pasteur (1822-1895)
Given how chaotic combat is, and the fact that a positive attitude and substantial military training helps win battles, maybe there’s a lesson in just being lucky. Psychologist Richard Wiseman wanted to know this, too, so he conducted some revealing experiments1. First, through interviews and tests, he was able to classify two groups of people as being either lucky in life or unlucky. The unlucky ones continually had “bad” luck events happen in spite of their best efforts to avoid them, while the lucky ones were so fortunate they actually came to rely on having good luck present them with solutions to life problems or new, beneficial opportunities. A wonderful example illustrates this distinction. Wiseman asked each of two people (each one previously tested as unlucky or lucky) to simply walk to a coffee shop and meet a researcher there. Unbeknownst to both people, Wiseman placed a £5 note on the ground at the entrance to the shop before the arrival of each person. The lucky person picked it up and the unlucky one didn’t (there was a replacement). Each faced the same opportunity, but with different attitudes. Through his research, Wiseman discerned four main principles of gaining good luck, described below. Obviously, we are not talking about stock selection per se, but on operating with a habit of mind that will guide us with high probability to wise investing.
Principles of Gaining Good Luck
|1||Maximize your chance opportunities||
|2||Listen to your lucky hunches (Create, notice and act upon chance opportunities)
|3||Expect good fortune (Positive expectations help fulfill dreams)
|4||Turn bad luck into good (Adopt a resilient attitude that transforms bad luck into good luck)
Notice that all these principles apply to one’s social network and one’s attitude about life itself.
What’s the difference between optimism and overconfidence?
An important and subtle line divides optimism and overconfidence. The latter is often associated with failure and mistakes. Truly confident people are better at recovery from setbacks/adversity, while overconfident are more easily discouraged. A possible deeper explanation may be the idea of “hindsight bias”. This is the tendency for people to believe an event was predictable based on information available only after the event occurred. Such believers unconsciously explain away current mistakes by saying they were really predictable after all, and thus learning from the bad outcome is blocked. Such overconfident people go on without updating their understanding of events. Overconfident investors frequently make mistakes and suffer poor returns.
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Richard Wiseman, The Luck Factor, Hyperion, New York, 2003