The Difference Between Skill and Luck (or why basketball > hockey)
- Joshua M Brown
- November 18th, 2012
This book The Success Equation: Untangling Skill and Luck is probably my next read as soon I finish this teen vampire thing I've been poring over with a highlighter for the last six months. I find this stuff utterly fascinating and Michael Mauboussin uses lots of examples from investing and finance to make his points.
There's a really good talk with Mauboussin posted at Wired this weekend in which the writer and scholar explains why some sports have a higher degree of luck relative to skill affecting final outcomes.
Basketball comes closest to chess in terms of being the game with the most skill involved. In comparison, hockey looks more like the lottery (and don't even ask about trading). His spectrum of pro sports and other activities below:
The bottom line is that the law of smaller numbers allows for more variance in individual player and game outcomes in a sport like baseball or hockey - in baseball the most skilled hitter only gets up to bat a few times per game and in hockey the star players aren't on the ice much more than a period or two out of three. Less plate appearances or ice time can mean that it is more likely that a fluke of some sort, good or bad luck, can make an impact. This is in contrast to basketball where there are only five players at any time and the stars typically play most of the game - more playing time means a bigger sample, by extension this means less variance.
I'll pause for a moment to allow all the Canadian, Russian, Eastern European and Minnesotan readers of mine to scream out an open window in outrage....feel better? Good. No one is saying skill isn't important in hockey, merely that half the goals are scored via accidental ricochet. Just kidding.
Anyway, it's more complicated (and interesting) than that, obviously, so I'll send you over for the whole thing. The applications here for investing and fund selection and stock portfolios and trading etc are mind-boggling...
Buy Michael Mauboussin's book at Amazon:
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.