Mauboussin: Untangling Skill & Luck
2010 August 18
Michael Mauboussin is the Chief Investment Strategist at Legg Mason Capital Management. He has published an excellent paper on differentiating between luck and skill.
There’s a simple and elegant test of whether there is skill in an activity: ask whether you can lose on purpose. If you can’t lose on purpose, or if it’s really hard, luck likely dominates that activity. If it’s easy to lose on purpose, skill is more important.
In this report, we will discuss why unraveling skill and luck is so important, provide a framework for thinking about the contribution of skill and luck, offer some methods to help sort skill and luck in various domains, and define the key features of skill in the investment business.
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