Luck in business: Dealing with uncertainty

FORTUNE — Michael Mauboussin didn’t realize that watching football on Sundays in college would one day land him his first job at an investment bank — but that’s the nature of luck.

Mauboussin, then a college senior, walked in for his final interview with a top executive at Drexel Burnham Lambert in New York when a trash can featuring the Washington Redskins logo caught his eye from under the executive’s desk.

A football fan, Mauboussin spent his 15-minute interview discussing a shared passion that had nothing to do with banking. The job was his. (Months later, he learned that the executive overrode reviews given by other interviewers in order to get him the position.)

“My career,” writes Mauboussin in his recently published book, The Success Equation, “was launched by a trash can.”

A combination of luck and skill contributes to every aspect of our lives, from the people we meet, to how much we earn, to how long we have to live. But understanding the role that each element plays is the tricky part.

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Mauboussin, who has more than 25 years of investment experience under his belt, explores in his book where luck and skill collide in sports, business, and investing. “I’d felt that in every case, being aware of the role of luck was simply not enough,” says Mauboussin, who also teaches at Columbia Business School. “The next step should be to try and think about how to quantify that and then, ultimately, what that should mean for making decisions.”

Business decisions, like how much to pay an incoming CEO or which mutual fund to invest in, often disregard the element of luck entirely. But assuming that prior success is merely associated to a person’s skill — and ignoring luck’s role — is dangerous, argues Mauboussin.

Good fortune seems to be more critical today than ever. The theory, explains Mauboussin, is that as more of the world becomes more skilled, luck increasingly becomes the deciding element that separates one outcome from another.

In his book, Mauboussin uses a baseball example to illustrate this idea — known as the Paradox of Skill — by focusing on Ted Williams, one of the game’s greatest hitters, and the last player to eclipse a .400 batting average for an entire season (which he did in 1941). It’s not that players today aren’t as skilled as they were during Williams’ time, writes Mauboussin. It’s that the standards in the league have risen. “The difference between the very best guys and the average guys is much smaller today than it was a generation or two ago,” he says. “So that means that luck, which has always been lurking in the background, is playing a larger role in determining outcomes.”

The same goes for companies, which are immersed in a social world that supports a winner-takes-all mentality, says Mauboussin. Two companies that bring identical products to market at the same time may experience vastly different outcomes. “The simulations show that if you were to play the world over and over, replay the tape, you would get different answers in different runs,” he says. That’s what makes investing such a risky business, especially investing in young, unproven startups. When all the controllable ingredients for success are lined up, all it takes is a little bit of luck to put one company on the path toward billions — or a little bad luck to send another spiraling toward the startup graveyard.

For many, the challenge is simply accepting that luck is completely outside of our control. Our brains may be our biggest enemies in coming to terms with this, as we naturally try to draw conclusions and determine causes for the things that happen in our lives, says Mauboussin. Those conclusions often exclude the role of fortune, especially when things go well. Success is often deemed a result of impressive skill; failure, on the other hand, is often chalked up to bad luck. “I think that’s part of the whole system where, ‘Hey, if I’m doing well it’s because I’m a good guy,’” says Mauboussin. “If I’m not doing well, then ‘Gee, the world doesn’t like me today.’”

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To investors, The Success Equation may seem starting; after all, no one wants to accept that their financial future is outside of their control. But the book also liberates in a way, reinforcing the belief that no matter what, we are all, in one way or another, at the mercy of forces beyond our reach.

“The key is to focus on what you can control,” says Mauboussin. “Some days things will go for you and some days they won’t, but as long as you are doing the things that are in your control as effectively as you can, you shouldn’t worry so much.”

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