Not seeing luck

I claimed the other day that those of us who are in the global 1% are apt to under-estimate our good fortune. There is, in fact, quite robust evidence from other contexts that we tend to under-rate luck and over-rate skill and causality.

For example, this recent paper says:

Retail day traders in the Forex market attribute random success to their own skill and, as a consequence, increase risk taking.

This is probably because of a self-serving bias: we want to believe we are smart, and the wish is father to the thought.

However, other research shows that people also see skill where none in fact exists even in other people. Here's a study of unit trust investors:

They fail to understand that, in large populations of mutual funds, a few will outperform by pure chance...In addition, investors do not sufficiently account for volatility and are thus likely to confuse risk taking with skill. In large mutual fund populations, this can lead to an over-allocation of capital to lucky past winners.

This sort of behaviour has been confirmed in laboratory experiments. Jordi Brandts and colleagues at the Autonomous University of Barcelona got a group of students to guess the outcome of five coin tosses. They then asked other students to bet on who of the first group could best predict future coin tosses. They found that 82% of students were willing to pay to back the individual who had been most successful in predicting the first five tosses. This is consistent with other experiments by Nick Powdthavee and Yohanes Riyanto, who conclude that "an average person is often happy to pay for what could only be described as transparently useless advice."

All this tells us that people under-rate the importance of luck even when doing so costs them money; this is true in both real world and laboratory settings. It's even more likely, therefore, that they will under-estimate luck when they have incentives to do so - because they want to think that their wealth is deserved and want to oppose redistributive taxation.

I suspect that this is part of an older-attested phenomenon - that people under-rate randomness and over-rate causality, which is one reason why we draw overconfident inferences from noisy data. As Kahneman and Tversky said (pdf) in one of the early papers in cognitive biases research:

[People have an] irresistible tendency to perceive sequences of events in terms of causal relations, even when the perceiver is fully aware that the relationship between these events is incidental and the imputed causality is illusory...[This leads to] major errors in prediction and explanation, which reflect the deep contrast between intuitive reasoning and the normative theory of evidence.

You might see this as an echo of David Hume's claim, that our ideas about causality result merely from custom and habit and so are fallible.

It also, I suspect, helps explain a claim made by Hume's good friend. If we over-rate causality and under-rate luck, we will exaggerate the extent to which the wealthy deserve their fortune. As a result:

We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent...The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness. (Theory of Moral Sentiments, I.III.29)

Comments

[Ben]

I would hope most people reading a blog like this already know this.

Again I think the analogy used is not helpful. Coin tosses are, given a "fair" coin, decided by chance.

The wider context of your post yesterday was that "we don't know how lucky we are". None of this maps into what is happening in the UK.

There is no coin. Politicians are buying votes of the main older voting block by pumping house prices thereby enacting an inter-generational wealth transfer which keeps the core vote happy in spite of the fact that the UK is collapsing.

None of this is happening by chance. The chosen vehicle of influence is land because land matters. If they pumped tulips now nobody would care. With land they have us other a barrel.

I think when it comes to economists getting a foothold on anything of any relevance to the world is very hard. The pull of the abstract is so strong for you.

[An Alien Visitor]

Luck clearly plays a huge role in how much you own.

However, let us separate out how much you own from what skills you have, i.e. let us not link these 2 things.

Under the above assumption, the problem I have with your line of thinking is that people who have better skills, are better trained provide better outcomes. So while luck plays a part in life investing in people abilities enriches us all. So we shouldn't view success through the prism of how much you own but what abilities you have and how those abilities contribute to the well being of all. Let luck take care of itself.

Obviously someone may be highly skilled in enabling rich people to avoid taxation, those skills should be eliminated.

So while luck cannot be got rid of, let's not pretend we can't contribute to outcomes.

[SIS]

Human beings are great at pattern making - it is one of the reasons we are by far the dominant species on this planet. The issue is that we seek patterns EVERYWHERE. As social apes, we also anthropomorphize everything, because out default is dealing with other human beings. This is why people will curse out a machine and accuse it of ill feelings towards ourselves, when the very thought is patently absurd. So we view the universe as being like a person, with intent, and that intent is discernible through patterns. Randomness is not a welcomed idea at all. It denies us "understanding."

[theOnlySanePersonOnPlanetEarth]

"This is why people will curse out a machine and accuse it of ill feelings towards ourselves, when the very thought is patently absurd."

Speak for yourself. Many people may do this but in a jokey and ironic way. You actually sound like you may have some kind of illness, if you in all seriousness shout at machines and believe they wish you ill will.

[David Ballard]

In sn't "over rating causality and under rating randomness" usually an example of not understanding the relevant causality?

[Ben]

theOnlySanePersonOnPlanetEarth - I think you take SIS too literally. I'm a programmer so understand how dumb computers are yet also anthropomorphise on occasion.

[SIS]

"Speak for yourself. Many people may do this but in a jokey and ironic way."

What a terribly ironic screen name you have. And sorry, but the behavior of people getting angry at and physically assaulting machinery is sufficiently documented and remarked upon for your claim to fall flat.

examples:
http://www.washington.edu/news/2013/09/17/emotional-attachment-to-robots-could-affect-outcome-on-battlefield/

http://ldt.stanford.edu/~ejbailey/02_FALL/ED_147X/Readings/nass-JOSI.pdf

http://www.ncbi.nlm.nih.gov/pubmed/14612325

http://sfussell.hci.cornell.edu/pubs/Manuscripts/Fussell-HRI08.pdf

[lower middle class]

If I can't pick a winner, I will choose 'all'. Thank you index ETFs!

[theOnlySanePersonOnPlanetEarth]

"What a terribly ironic screen name you have."

Obviously not if you believe many people, in all seriousness, think machines bear them ill will!

If you actually, in all seriousness, accuse, for example, a toaster or computer of bearing you ill will you need professional help. And seriously, the mental health profession would agree with me. I did hear of a schizophrenic who believed time machines were blocking his route to the bathroom.

[derrida derider]

The Person Formerly Known as Sane is clearly unfamiliar with the Basil Fawlty school of car maintenance (https://www.youtube.com/watch?v=mv0onXhyLlE)

[Dain]

I agree that luck is a huge part of what makes the wealthy wealthy, contra many conservatives. But it's a huge non-sequiter to think this implies redistribution, contra many liberals.

[theOnlySanePersonOnPlanetEarth]

derrida derider, that was a fictional comedy character and not a real person. And even if it was it would not be normal behaviour!

Now you and SIB may believe your toaster is out to get you, just don't think that applies universally!

My screen name is getting more relevant by the day!