Quotation at the Daily Dish from Felix Salmon:
In fact, given the thousands of people in the market, it’s a statistical certainty that many of them won’t just be right once, but will be right time and time again.
I’ve often wondered to what extent we should view business executive success and recklessness as being explained by a blind “natural selection” process acting on random financial fluctuations.
Look at it this way: you have (let’s make up a number) twenty thousand low-level managers; half of them are somewhat cautious and don’t lose much, but they don’t make much either. The other half engage in risky practices that maybe only have a 10% chance of success, but yield a correspondingly higher payout than the cautious strategies. We can stipulate that all of these risk takers are equally clever and competent, but by chance 90% of them will fail and get booted or ignored, but the successful 10% will get promoted.
Now we have a thousand mid-level managers who are inclined to take risky actions. 90% of them will fail to get lucky a second time, but 10% will strike it big again. These select hundred are now viewed as being visionary money-makers, and are promoted.
Of course, we go through the process again, and we’re left with ten executives who are convinced of their own genius at having played ten-to-one odds and having won big each time, and who are convinced that risk-taking is a recipe for success. And yet, by stipulation, they’re actually no better at what they do than the folks who lost at the earlier rounds, and may even be substantially worse than those who got left behind for playing things safe. And low-gain but low-loss strategies will be viewed as non-viable, despite the fact that the failure rate of the risky strategies is 90%.
(See also: Fundamental Attribution Error.)