Luck, from Jeff Watson

February 11, 2008 |

CubeAll my life, I've heard the familiar refrain on how "So and so is such a lucky person, they always win." I've been to the track and seen guys sweep the whole card of trifectas, much to the chagrin of the losers who attribute this feat to that elusive concept called luck. I've seen people throw away all of their money in pursuit of the long shot, afterwards labeling themselves as "Having a streak of bad luck." The concept of luck always intrigued me, and caused me many sleepless nights in grad school trying to prove, or disprove luck's existence. After a few months of thought, I eventually came up with a very elegant proof that denied the existence of luck. Ever since that moment, equipped with a new mind set, I have viewed all events as random occurrences that are subject to the laws of probability. This idea served me very well over the past few decades, and allowed me to eliminate one more emotional distraction regarding my management of risk in trading, at the track, or at the poker table. I simply denied the existence of luck for the past 30 years and chalked up all occurrences to probability.

About a week ago, my lovely wife, who's assimilated a lot of knowledge about trading through osmosis, came out with a startling statement regarding luck. We were discussing her illness when she blurted out, "You know, luck is a zero sum game." She made that profound statement at a time when I was vulnerable, and it got my mind spinning. I started to revisit a few thoughts about luck, and the meaning of luck. For simplicity's sake, I decided to define luck as a positive outcome to an event, random or otherwise, and bad luck as the opposite. I saw that my wife had a good point, provided that luck exists in the first place. She went on discussing that rain might cause good luck for the farmer while at the same time cause bad luck for the concert promoter who's outdoor concert was rained out. She gave about 10 more like examples of good luck/bad luck, and they all ended up having a zero sum, canceling each other out. However, I brought up the concept where one might have good luck, and the opposing party did not have bad luck, or merely had a case of lesser good luck. I mentioned a poker table where there was one big winner, four smaller winners, and one loser. I revisited the rain being good for the farmer, but too much rain might be bad. My lovely wife brilliantly speculated that there might be a big clearing house somewhere in the universe that dealt with luck, transferring the luck to the clearing house and doling the good and bad to random parties. A cosmic Karmic clearing house, so to speak. The clearing house analogy got to me, as I didn't even know that she knew what the function of an exchange clearing house was. All of this philosophical discussion finally got to her, tired her out, and she finally had to get some needed rest. Meanwhile, I was left with something very insightful to ponder, that zero sum concept of luck. In my usual attempt at avoidance and to remain dispassionate, I got back to my sugar position. Someday, I better find that old journal and revisit that proof.

Kim Zussman cautions:

We attempt to apply Statistics to markets because we see an analogy between markets and gambling. You bet when the deck is rich; count the cards and you will know.

But what if the dealer of the markets:

1. Shuffles under the table or may not shuffle - you cannot know (without inside info)

2. Might be using more than one deck

3. Sometimes uses a deck which favors your opponents

4. Usually favors you but occasionally ruins you

5. Knows that you need the action and abuses this knowledge

6. Knows that you will exploit your knowledge of him to others, especially the weak, ignorant, and women

Henry Gifford writes:

Simple proof that luck doesn't exist: You can't measure it. 

J.T. Holley adds:

The key to quantifying luck is (to paraphrase Thomas Jefferson) "the harder I work, the luckier I get".

If I was going to quantify luck this is where I would start going forward.

Those that have windfall luck from pure chance without doing anything usually lose the benefit within a short time it seems to me. Those on the other hand that receive a windfall from hard/smart work usually compound it from that point.

Vince Fulco agrees:

In his latest book, GM Gary Kasparov harps on this point.

"One interesting, and humbling thing I've noticed while analyzing my own games for publication is how poor some of the ideas I prepared really were…Only a fraction of these ideas every saw the light of day, either because my opponent didn't fall into my trap or because I found a better variation to play. Now I see that in many cases that was not a bad thing….This kind of preparation served me well in a way I never quite appreciated while I was working on it with such determination. These periods of intense preparation were rewarded with good results–even when I didn't end up utilizing the fruits of my labors. There was an almost mystical correlation between work and achievement, with no direct tie between them.

There is also a practical benefit to "wasted" effort. Work leads to knowledge, and knowledge is never wasted…"

Adam Robinson adds:

This sentiment echoes that of another strategist, General Eisenhower: "In preparing for battle I have found that plans are useless, but planning is indispensable."

Perhaps Kasparov romanticizes, however, in the "mystical" lack of correlation between his preparation and his later results. Surely having immersed himself in a position or a variation for some hard thinking, even though over the board he played "something different," he subconconsciously gained insights that facilitated his over-the-board analysis.

Writers experience this phenomenon all the time. You write something, read it over, and then scrap it and write something "completely different" that you realize now was what you meant to say all along. But you couldn't have gotten to that insight without first going down the "blind alley." I once scrapped an entire book manuscript and rewrote it from scratch for the same reason.

Alan Millhone relates it to checkers and stocks:

The late Checker World Champion, Tom Wiswell,  once told me to always make your best move in a game and never assume your opponent will make anything but their best move each time it is their turn. Play for superior position in your game. Luck comes to those who are well prepared.

Being prepared in the Market would be no exception. In Checkers I study past games of top players, keep a hand written manuscript , have a large Checker library for reference. Luck is when preparation meets opportunity.

In the Market one has to know your stock in every detail to make effective trades (like good moves in a Checker game).

The late and great Vince Lombardi said it best, " Luck is the residue of preparation ".

Sam Marx makes a distinction:

I will have to admit that my two most profitable moves in my lifetime were in investments and they were because of luck, also they were relatively cheap and I held them for a long time.

My success in trading, however, was not luck but based almost entirely on probabilities.

Investments vs. Trading. Perhaps luck plays a greater part with investments than trading and we should make that distinction.






Speak your mind

6 Comments so far

  1. steve on February 11, 2008 9:23 am

    According to Merriam Webster: 1luck Pronunciation: \ˈlək\ Function: noun Etymology: Middle English lucke, from Middle Dutch luc; akin to Middle High German gelücke luck Date: 15th century 1 a: a force that brings good fortune or adversity b: the events or circumstances that operate for or against an individual 2: favoring chance; also : success — luck·less \-ləs\ adjective Thus the first definition implies that some outside agency caused an event to transpire. The second definition indicates that something outside of the normal statistical expectation has occured. As such, it is far easier to say "So and so is lucky" rather than "So and so is experiencing a statistical anomaly." With respect to the first statement it is a theological or cosmic argument whether one is receiving "favorable treatment" With respect to the latter, one may be on a "run" and a global statement as "So and so is always lucky!" is of course anecdotal. This can not hold since eventually the numbers do take over and statistics prevail in the long run. Nobody continuously beats a system. We know this to be true. It can be financially costly when one confuses the former with the latter. In poker, One's bad beat is another's good fortune. Thus it is a zero sum game if one eliminates the "rake" and the tips. To win in the long run skill is required, in the short run luck plays a more intimate role. Success and even exceptional success occurs when preparation, skill and luck meet. Steve Leslie.

  2. b on February 11, 2008 12:56 pm

    The concept of zero-sum luck doesn’t have to extend beyond your existing framework with probabilities. You could make the case that the probabilities specifically arise from the vast number of interactions in the world (human, environmental etc.) - and it wouldn’t be surprising that the implication of any event happening both stems and results in those other factors changing.

  3. George Parkanyi on February 11, 2008 1:48 pm

    With all due respect, I don’t believe luck is a zero-sum game. Even famous physicists describe, with awe, that the universe acts more like a thought than a machine.

    I personally have spiritual beliefs, confirmed, at least to the extent that I am able to interpret them, in specific experiences. I would find it hard to imagine that everyone in this forum is a die-hard atheist or agnostic - quants that many of you are, so I imagine others may have had similar experiences, and/or a similar perspective on life.

    If we truly are evolving in some fashion, perhaps there is more than enough luck to go around - we just don’t always see it. If you have a wonderful daughter that brings you endless joy but you lose your shirt in the commodities market, are you lucky? If you have horrible, unappreciative children, yet you make millions in the markets, are you lucky? Would it not depend on the frame of reference and your interpretation of events, and thereby would luck not be relative?

    Even within a mechanistic paradigm for the universe, I don’t believe luck to be a zero-sum game in the context of human activity. The markets are a proxy for human cooperation, and great wealth, and also great benefits have come from them. Wherever you live, look around you. Look at all the homes, roads, cars, the food, the entertainment, the knowledge … are YOU lucky? If you think so, then a lot of people have contributed to your luck. And who’s luck might have you contributed to directly or indirectly? Would there not then be a hefty element of connectedness and causality associated with luck?

    If you made a ton of money in the markets, didn’t someone have to create those markets in the first place - essentially the pre-conditions - for your luck?

    Wonderful, mysterious stuff …


  4. Glendon Jones on February 11, 2008 8:48 pm

    Luck may be zero-sum over a very long period of time, and it may be zero-sum in terms of counting of events (lucky vs unlucky). But in a short lifetime, the summation of the magnitude of luck can be far from zero-sum. I’m a golfer, and over 12 years at the club I couldn’t understand how this one middle aged couple (together and individually) could have so much luck in winning club events and prize draws (cheating was not a factor). Their combined wins were far beyond what one could expect on the basis of randomness (and handicap). They were also lucky in that they had a very happy marriage. Last year, the wife suddenly developed cancer of the pancreas and died within a few weeks. That was unspeakably bad luck for them, a single event that obliterated the overwhelming instances of good fortune they had experienced in the prior 12 years.

    I also remember having a long streak of winning option trades, during which I parlayed $5000 into about $200,000. The day after markets shut down early in 1998 (Asian contagion), I couldn’t get to the phone to unload my puts, and by the time my plane landed later that day, the $200,000 had diminished to $10,000 as Greenspan came through with a major liquidity infusion. So, I had ten trades in a row with luck on my side, one trade with bad luck, and say goodbye to Hollywood. Everything in life comes down to timing.

  5. jeff on February 11, 2008 11:40 pm


    Describing the couple who won at golf and the prize draws all of the time doesn’t seem to violate any laws of probability , or randomness for that matter. The odds of them winning all of the events is better than winning a single Power-Ball jackpot.

    My son sent me this nifty little toy for playing with random occurrences.

  6. Russell Sears on February 13, 2008 6:02 pm

    The late and great Vince Lombardi said it best, "Luck is the residue of preparation." I disagree — my late and wonderful Granpa Wirth said it best when he would pull out his hanky to wipe the sweat and dirt from his brow, "My lucky hanky, the more I use it the luckier I am."Hence why "luck" and the markets are not zero sum.


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