How Can We Learn From Risk and Luck?
Risk and luck are different sides of the same coin. We cannot understand one without appreciating the other. Both of them emphasizes on the idea that outcomes can be influenced by events outside of our control. We treat risk as an important factor to take note of, but we belittle luck most of the time. Yes, we can glorify and point at hard work and persistence, but if risk is what happens when we make good decisions and end up with a bad outcome, wouldn’t luck be what happens when we make a bad decision and end up with a good outcome? Luck is often downplayed and ignored, because we feel that we are in control of risks. The truth is we aren’t. It is a risk for a reason, if not we could have known it to be a certainty. There will be times we have to be honest to ourselves and acknowledge that our success was partly influenced by luck.
More than that, we have to understand how risk and luck, albeit it being the same coin, can have different effects on us.
When we experience risk, we recognise that there will be things that are out of our control. When it comes to investment, we’ll never truly know how underpriced or overpriced something can be. There is a sense of fear which is accurate feedback to help adjust our strategy. On the flip side, when we experience luck, it generates an opposite reaction. It creates a sense of falsehood that we’re actually in control. We did something and we got our desired outcome. When we neglect the factor of luck, it forms an unhealthy thought-process in the long run. We want to believe that we can identify patterns of what works and repeat lucky outcomes. We want to be in control of the narrative. But the truth stings.
The house always win, because you were lucky on that one day and continued to believe that luck has nothing to do with your success.
By highlighting reality, risk guides us to be more conservative. By illustrating possibility, luck increases our confidence without increasing ability. Whether it is coming from a risk manager or not, we can accept scenarios which involves low or high risk-adjusted returns. But when it comes to luck, we can’t seem to accept the idea that perhaps one day we’ve ran out of luck. It often starts with a spark of success. Our initial success gives us optimism in our own skills. This causes us to let our guards down and neglect what is happening. But there is a difference between being right and staying right. It might just be the very case that we were at the right place at the right time with the right people.
Often, serendipity masquerades as skill.
Getting something is vastly different from keeping something. Making a friend requires you to be slightly over enthusiastic initially, possibly share common themes and be trustful in that moment. Maintaining that friendship requires you to understand that humans change overtime. There will be instances when we become complacent and desperately hoping that honesty and trust will still be there, but that is the critical moment when the friendship is put to test and possibly fall apart. It is similar to money too. Keeping money is different and a lot harder than making money. We can get rich(er) by having one or two of those lucky days, but we can only stay rich when we come to terms that we should not be complacent about being lucky. We get rich by being bold. We ask for a pay raise. We change to a different industry. We take up that side hustle. We buy a certain asset during a time when most people don’t want to.
We get rich by being brave, but we stay rich by being doubtful.
We’ve been taught since young that when we’ve put in so much effort into developing our views and decisions, we deserve to be right. We’ve been right (and lucky) thus far, who is to dictate that what we’re going to do next will be wrong? We’ve had past success which got us where we are now. We’ve presumably put in long hours and been through the grind. We deserve it, we deserve to be right. We start to extrapolate with enthusiasm what worked in the past. We stick with our strategy and actions, but with twice the appetite. It will probably work if our actions have a direct impact on the outcome, such as bodybuilding. You pile on more weights as time lapses on, you’re bound to grow bigger. But what if we underestimate the role of luck? What if we underestimate how much of our past success was simply us being right there at the right time with the right people? What if our success was merely a string of coincidences? The right colleagues around us at that time, the right social or economic trends at that time, the right moment that can’t be repeated the next time we want it to? We vividly remember the times when we were unlucky as hell, but what about the times when we disguise our lucky encounters with our ego?
