How To Differentiate Skill From Luck

Let's say you have a friend who has consistently won in the stock market over the last year, performing multiple trades. They must know their stuff, right? I mean, what are the odds of someone consistently beating the stock market over a year?

Well, that is a common fallacy because while the odds of any individual beating the stock market are very low, if you poll, let's say, 1,000 individuals playing, the odds of any of them winning are much more plausible, even if they played "randomly."

Falling into the misconception that success is solely attributed to skill while overlooking the role of luck can be a common pitfall. Therefore, it's crucial to differentiate between the two. In the book "Superforecasting," the authors suggest that consistently successful outcomes over time likely indicate skill rather than luck, especially if decisions are based on well-researched, logical strategies and involve learning and adapting from feedback, whereas impulsiveness or intuition-based decisions might be more attributed to luck.

In life, everything combines luck and skill, so it is always hard to attribute the exact reason to one or the other. However, using these checks allows you to filter situations that might be more due to skill. Understanding what skill is and how to improve it is the essential part and what we can control.

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