The Success Equation

There’s a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose. In games of skill, it’s clear that you can lose intentionally, but when playing roulette or the lottery you can’t lose on purpose

reversion to the mean

the expected rate of reversion to the mean is a function of the relative contributions of skill and luck to a particular event… If you’re playing roulette and win five times, you’re better off leaving the table, because you can be sure you’re going to lose as the number of plays increase

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Undersampling of failure, aka playing someone else’s winning lottery numbers

attributing success to any strategy may be wrong simply because you’re sampling only the winners. The more important questions is: How many of the companies that tried that strategy actually succeeded ? … Say two companies pursue the same strategy, and one succeeds because of luck while the other fails. Since we draw our sample from the outcome, not the strategy, we observe the successful company and assume the strategy was good.

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