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When Dumb Luck Happens to Smart People

“Luck is my middle name. Mind you, my first name is Bad.” -Terry Pratchett

On the plane ride back from Houston last weekend, I resisted the temptation to watch Lindsey Lohan in the movie Just My Luck. This movie got me to thinking, though. Luck sure has been in my face in two classes I am taking this semester.

The first is called Dynamic Markets, in which a person’s grade is perhaps the most objective at HBS-it is tied to each person’s rank in cumulative trading profits from market simulations. The first day of class, however, the professors warned us that this course replicated the market closely, and therefore anyone who could not handle having an unlucky trading day should not be registered in the course. At the same time, they told us that over the long term, luck would become less and less of a factor, while trading profits would gravitate towards the most skilled individuals in the room. Unfortunately for me, that means that it is getting harder for me to blame bad luck for my miserable performance! In the real world, on the other hand, I think that luck plays a much larger role than it does in Dynamic Markets. From my prior life as a risk manager, I would model Value at Risk (VAR) at a 95% confidence level. In other words, given historical and implied volatilities, I would predict with 95% certainty the maximum amount of money the company could lose over a given time horizon. The problem, of course, is with that pesky 5%, whose only loss limit is bankruptcy. The unforeseeable events in this probability distribution tail, such as the Asian financial crisis, September 11, Long Term Capital’s demise, and Enron’s collapse, can shift entire fortunes overnight.

The second class I am taking where luck appears to take a prominent role is Management in Perspective, in which successful business people are invited as guest lecturers to discuss their career paths and personal lives. A stark dialectic seems to be taking shape in the stories we have heard so far this semester. Roughly divided, half of the guests appear to have worked assiduously toward their career vision, whereas the other half stumbled along until they were presented with an opportunity of which they took full advantage. In fact, I have come to enjoy looking around the auditorium at the incredulous faces, stupid grins, and stunned head shaking whenever a guest attributes luck, not skill, to their success.

I know when to scan the lecture hall because I am just as shocked as everyone else, for luck engenders such conflicting emotions in me. On the one side, it fills me with trepidation. I want to be ensured of success. I want to know that if I am smart, work hard, and play by the rules, I will find the pot of gold at the end of the rainbow. At the same time, luck fills me with hope. Although I am confident in myself, I know that I am neither the smartest nor the hardest working person out there. Luck levels the playing field and raises the stakes. A spreadsheet told me that an MBA was a good investment, but it will take luck, if anything, to produce alpha-sized returns.

October 16, 2006
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