Why we're bad at investing part 2: We discount luck

A key difference between investors and entrepreneurs

“The harder I work, the luckier I get.”

  This quote is most commonly attributed to film producer Samuel Goldwyn. Then again, Thomas Jefferson is also quoted as having said “I’m a great believer in luck, and I find the harder I work the more I have of it.”

I don’t know who was actually the first to say it, but it encapsulates the feelings of most people who have achieved great things.

It’s true—what outsiders might perceive as luck has a way of presenting itself most often to the most well-prepared and hardest workers.

But one must be careful about discounting the role of randomness in our success.

The entrepreneur is prone to what psychologists call “self-attribution bias.” It manifests itself in many ways—some harmful, and some helpful.

We tend to ascribe our success to internal factors (I’m smart, I work hard, I’m a great problem solver) and our failures to external factors (the regulations were too restrictive, taxes made us uncompetitive, the weather did not cooperate).

Of course, this can be damaging if taken to an extreme, with the belief that every bad outcome is someone else’s fault. However, if harnessed in the right way, this can reinforce a belief in your own ability to improve your situation, which is unequivocally a good thing.

Individuals who see the world through this “internal locus of control” believe that their actions matter, and that they can control their environment and their circumstances. Outside forces, such as luck, are not a factor. They control their own success.

And so it is with many entrepreneurs. Often, the mere suggestion that they got lucky is met with hostility and derision. And I get it. The many hours of work. The sleepless nights. The dedication to fight through many struggles. It takes a certain type of hero to persevere through the challenges.

Indeed, studies have confirmed this intuitive theory. In a 2017 paper titled “Luck and Entrepreneurship,” Liechti, Loderer, Peter and Walchli study a survey of over 63,000 individuals to determine how different businesspeople think about luck. They find that “individuals who believe luck is important are reluctant to become entrepreneurs, and those that do exhibit lower commitment.” This is not surprising. It confirms that when we’re talking about entrepreneurs, we’re dealing with a group of people who don’t believe much in luck.

But it’s still important to acknowledge the role that factors outside of your control may have had on your success. Good timing. The mistakes of a competitor. Commodity prices. Currency exchange rates. The list goes on, and if we’re honest with ourselves, we can all identify factors which, had they been different, would have negatively impacted our success (or erased it altogether).

The thing about investing successfully is that you have to hand over much of your fate to luck. The right investment at the wrong time is just the wrong investment.

You must be confident in your analytical abilities, but not so confident that you can’t admit when you’re wrong. Where many entrepreneurs succeed through sheer will and determination, investors need to maintain a unique balance of confidence and humility.

A too-strong internal locus of control can kill an investor.  No matter how solid your analysis is, you can’t influence stock prices to move in the direction you want them to go through sheer force of will. The point of the game of investing is to tilt the odds ever so slightly in your favor. To maximize profits when you’re right, and minimize losses when you’re wrong. It’s a different state of mind than the one you might be used to. And it’s why so many entrepreneurs have trouble adjusting to the investor’s mindset.