The Science of Investing: How Important is Luck?

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February 2, 2025

In the annals of technology, tales of genius and visionaries captivate our imagination, yet they often go beyond the exceptional skills these individuals possess; they delve into the fine balance of luck and timingOne such tale centers around a lesser-known figure, Gary Kildall, who, despite his pivotal contributions to the software landscape, remains a shadowy figure when contrasted against giants like Bill Gates.

Set in the sprawling tech scene of the 1970s, Kildall found himself at the forefront of an emerging era with a keen eye for opportunityThe birthplace of his ingenuity was a simple company he founded, dedicated to creating software for microcomputersHis foresight led him to realize that the burgeoning market was ripe for his innovative ideas, and thus, he possessed not only talent but also vision.

Kildall's venture began modestly

The work environment he fostered, one of informality and comfort, was a reflection of the time—employees sauntering in casual attire, while formal visitors stood out like peacocks in this reverberating realm of tech innovationBarefoot and carefree, they operated amidst a backdrop that was as dynamic as the technology evolving around them.

It wasn't long before his company’s operating systems began gaining traction, particularly after a critical partnership with IBM emergedThis collaboration, a game-changer, thrust Kildall’s work into a realm of visibility that proved transformative, propelling him—and his company—into an era where demand for personal computing surged.

Despite the soaring success, Kildall’s trajectory was not solely determined by his intellect alone

Luck played a significant role tooIn the summer of 1980, he was in discussions with IBM about a new personal computer operating systemHowever, due to a series of unforeseen events, this deal did not materialize until Gates stepped in—a serendipitous moment that would change the course of history.

The narrative takes a darker turn with Kildall's tragic demise in 1994, cut short by an accident and the struggles of alcohol addictionAfter a been a pioneer in the tech world, he succumbed to injuries sustained in an incident at a motorcycle bar, leaving behind a legacy as enigmatic as his lifeBuried in Seattle, his gravestone bears the tribute of a diskette—an eternal nod to his contributions.

One might ponder, had fortune smiled upon Kildall differently, could he have become the billionaire icon so often associated with the software boom? The question of luck presents itself as a theme threading through the narrative of success

Bill Gates himself acknowledged the dichotomy of skill and fortune, pinpointing that a large part of Microsoft's ascent hinged on being at the right place at the right time.

This relationship between success and fortune raises intriguing philosophical questionsHow much of success is really dictated by skill, and how much is merely the byproduct of lucky breaks? This conundrum stretches far beyond the tech industry, touching upon the realms of finance, sports, and beyond.

Australian financier Michael Mobusson dedicated his research to unraveling this very notionDrawing upon a wealth of experience from investment firms and academia, Mobusson penned "The Success Equation," emphasizing the balance between skill and luck in various fieldsHis insights encourage readers to interrogate where their failures stem from—whether a lack of effort or an uncontrollable influence.

In a world where the unpredictability of luck dominates, many often find themselves grappling with the illusion of control over circumstances beyond their reach

alefox

The profound wisdom of Reinhold Niebuhr’s serenity prayer resonates in this context—it implores the acceptance of what cannot be changed, urging individuals toward courage for what can be changed, with the discernment to distinguish between the two.

Contemplating the distributions of success, one must acknowledge that life unfolds unexpectedlyOften one song might prevail over another, not due to inherent superiority, but simply because it garnered initial traction among listeners—spurred by the ever-communicative social landscapeThis is the essence of the "cumulative advantage," where minor differences in the beginning can amplify into a staggering disparity over time.

In observing these phenomena through the lens of a power law distribution, we uncover a pattern where a select number of entities—whether books, ventures, or individuals—strikingly outpace the rest, while many others languish in obscurity

The rich get richer, and innovation or quality alone often fails to guarantee success against the surge of popularity.

This disparity reminds us of the reality in a society driven by connections and visibility, where those being linked to powerful platforms—like established media or renown websites—amass disproportionate followings compared to those without such associationsThis process embodies the essence of network effects, which can seem mercilessly rigged in favor of the already-advantaged.

For example, if a new website links to popular, oft-visited platforms, it benefits from their network and visibility—creating a self-reinforcing loop of successThis phenomenon plays a crucial role in an array of sectors, from entertainment to technology, and drives societal dynamics.

Marcus Granovetter, a Stanford sociologist, astutely highlighted the significance of critical thresholds or tipping points

For instance, in a hypothetical scenario involving potential mob instigators, even minor shifts in the threshold of what prompts individuals to engage can lead to remarkably different outcomes in societal behavior—peace or riot stemming from incremental changes.

Understanding these intricate dynamics that involve both network effects and cumulative advantages helps decipher the duality that exists within every sector, particularly in economic realmsAs competition heats up, the winds of change often favor those who’ve already gained traction, leaving behind an array of ‘what-ifs’ for those trailing behind.

In the stark realm of game theory, where the parameters shift based on outcomes of previous attempts—every action leads to repercussions that echo through time, setting the stage for either continued advantage or downfall