It's All a Game

Last Saturday Al and I got the kids up at 4am to watch the Rugby World Cup Final.  We were cautiously optimistic that England might win (the English know to never be overconfident about their team).  Sadly, it wasn’t to be.  The South Africans played a far superior game of rugby and the writing was on the wall from the first minute.

I grew up in a household with four sisters, and one brother.  Somehow, rugby ruled.

The feeling of deep anxiety and stress that I feel now when I watch England play comes from years of watching my Dad erupt with a level of passion that I am not sure I have seen played out in any other aspect of life, by anyone I know.  To ease the stress I continually tell myself ‘it’s just a game, it’s just a game.’ 

This match got me thinking about a few things.  Firstly, the South African’s captain Siya Kolisi’s extraordinary life story about growing up in severe poverty made me wonder if his drive to win was stronger than that of anyone else on the pitch.  I would love to know how that impacted the game.

Secondly, I am interested in how much luck is involved in a game like that. We routinely underestimate the role of luck in sport (and life).  We have a tendency to say it was bad luck if we lose, but skill if we win.  That’s the overconfidence bias coming into play.

We lost a player to a concussion two minutes into the match.  A stroke of bad luck for sure.  South Africa scored a beautiful try after the ball bounced right into Lukhanyo Am’s arms and he offloaded it onto his winger who cruised over the line.  A lucky bounce? The concussion and the first try both played a large role in the outcome of the game.

Now, I am not saying that South Africa won because of luck.  Quite the contrary.  But luck plays a larger role than we think in sports (and life, and investing), particularly at the International level. 

The paradox of skill says that as people become more skillful, luck becomes more important.  There can be no rugby game with a greater combined level of skill than the World Cup Final. Accordingly, luck will have played a much larger role than it does when two local clubs battle it out on a Saturday afternoon.

Michael Mauboussin has studied the role of luck and skill in various endeavours and he explains it as a continuum.  Different sports fall in different places.  Michael is American and therefore rugby does not feature on his chart! My guess would be that it falls between football and basketball.

Michael tells us that the way to work out how much luck or skill is involved is to ask yourself whether you can lose on purpose.  Roulette, on the far left, is pure luck – you cannot lose on purpose.  Chess on the other hand is pure skill – a chess master can presumably lose on purpose to anyone.

In most sports you can’t always lose on purpose.  You can be sure to never put points on the board, but your opposition could be so bad that they also fail to put points on the board.

Do you notice where investing falls?

There is huge amount of luck involved in investing – more so than in sport.  It’s very hard to analyse the performance of any manager and break it down into skill and luck, particularly over short time frames.  One of the most dangerous things we can do as an investor is attribute a good performance to superior skill and a poor performance to bad luck.

The world of investing today is much more like a World Cup Final than it is a clash between two local teams.  Investors have been getting more skillful and better equipped (think of the technology and data we now have at our finger tips) for decades but fewer and fewer are managing to outperform the market.  The paradox of skill tells us that luck is more important today than it ever was.

Georgie

georgie@libertywealth.ky