Success Equation

Luck-skill continuum

The difference between success and failure has come to depend on a mistake of only fractions of an inch. Because everyone is uniformly more skillful, the vagaries of luck are more important than ever.

For activities where little or no luck is involved, the paradox of skill leads to a specific and testable prediction: over time, absolute performance will steadily approach of physical limits, such as the speed with which one can run a mile.

Luck can overwhelm skill in the short term if the variance of the distribution of luck is larger than the variance of the distribution of skill.

In other words, if everyone gets better at something, luck plays a more important role in determining who wins.

The Outlier

Outliers reached their lofty status through a combination of ability, opportunity, and utter arbitrary advantage.

Cognitive performance: Fluid vs. Crystallized Intelligence

Skill is closely related to being competent at making decisions, the keys include understanding information, integrating information in an internally consistent manner, identifying the relevance of information in a decision process, inhibiting impulsive responding. Those skills change as people age.

Automatic decision-making (using intuitive) only works when under very specific circumstances, when the environment is stable and an individual has the opportunity to spend a great deal of time learning about it. Trouble arises when individuals rely too heavily on their experience in making automatic decision. When we age, we tend to avoid exerting too much cognitive effort and deliberating extensively over a decision that needs to be made. We gradually come to rely more on rules of thumb, means, we make poorer choices in environments that are complex and unstable.

In other words, skill declines with age. The research showed a sharp drop in performance around the age of seventy.

The ability to make good decision can also be viewed as a collection of cognitive capabilities that change with age.

Fluid intelligence refers to the ability to solve problems that you've never seen before, doesn't depend on something you've learned.

Crystallized intelligence is the ability to use the knowledge accumulated through learning.

Fluid intelligence peaks around the age of twenty and declines consistently and steadily throughout life. The decline in fluid intelligence appears to be related to general cognitive slowing and to reduced volume and decreased functioning of the frontal lobes. The frontal lobes are involved in higher mental functions, including planning for the future and restraining emotional responses. The frontal lobes are active when we solve tasks that involve fluid intelligence.

The ability to reason with numbers also tends to erode with age.

Crystallized intelligence tends to improve with age, relevant to the idea that older people are wiser because they know more.

The average age of peak performance in matters of finance is fifty-three, no matter what the financial task is.

Math, physics, poetry are fields that have been dominated by younger practitioners, while older people tend to do better in history, biology, and novel writing.

Intelligent quotient (IQ) vs rationality quotient (RQ): why smart people do dumb things

Considering cognitive skill, RQ is primarily what we are after. The attributes of RQ include adaptive behavioral acts, judicious decision making, efficient behavioral regulation, sensible goal prioritization, reflectivity, and the proper calibration of evidence. Plenty of people have adequate intelligence but an inability to think and behave rationally. The gap between IQ and RQ is the result of trouble with mental processing and limits to what we know.

A cognitive misers are when solving problems relying on cognitive mechanisms that are fast, low in computational power, requiring little concentration, rather than recruiting those mechanisms of the mind that are slow, computationally intensive, and requiring effort. Another characteristic of a cognitive miser is the tendency to reason from an egocentric point of view. This bias leads to systematic and predictable departures from rationality.

You don't need a genius IQ to make good decisions. A low RQ also stems from the issue of what we don't know.

The older adults rely more on rules of thumb, which would suggest that the cognitive processes behind RQ decline with age.

The many shapes of luck

Independent vs dependent outcome

The success of pop songs: the events we see in the world are far different from a normal distribution. If one song happens to be slightly more popular than another at just the right time, it will tend to become even more popular as people influence one another.  This effect, known as cumulative advantage (the power law), two songs of equal quality or skill, will sell in substantially different numbers. That makes it next to impossible to predict success. Skill does play a role in success and failure, but it can be overwhelmed by the influence of luck.

Independent means that what happened before doesn't affect what happens next; dependent means the first event influences the next one. A system in which events are dependent is a system that has memory of what happened before.

If they are dependent, as many social interactions are, then the distribution of luck is skewed., where good and bad luck are not balanced. Rather, a few benefit from extremely good luck. This means, skill and success are only loosely connected. Events in this systems are not random, but they are nonetheless unpredictable.

The distinction between dependent and independent outcomes is crucial. A path-dependent process is one in which what happens next depends on what happened before. These processes are very sensitive to initial conditions and lead to phenomena such as the rich getting richer and the poor getting poorer. The "Matthew effect" = for whosoever hath, to him shall be given, and he shall have more abundance, but whosoever hath not, from him shall be taken away even that he hath.

The Matthew effect explains how two people can start in nearly the same place and end up worlds apart. In these kinds of systems, initial conditions matter. And as time goes on, they matter more and more. Preferential Attachment (website case, link your site to sites that already have connections such as Google), the more connections you already have, the more new connections you get, amplifying over time.

Critical points and phase transitions are crucial for Matthew effect. A phase transition occurs when a small incremental change leads to a large-scale effect (tipping point). Social systems have critical points and phase transitions.

In economics, the lopsided outcomes are frequently the results of increasing returns and network effects. Much of conventional economic theory is based on diminishing returns. If demand exceeds supply, prices will rise, high profits attract competitors, will increase production and push prices back down (negative feedback), a system that promotes stability. The strong get weaker and the weak get stronger.

But in some sectors, this framework doesn't work because of "positive feedback", promotes change, takes hold.