Why do some people seem to succeed so effortlessly, while others, equally as skilled, fall short? A start up with a carefully strategic approach fails, while a similar one becomes a highly successful company. A student studying for hours and getting a passing grade, while another barely prepares and excels. We tend to explain these outcomes through skill, talent and hard work, but what part of this unexpected success actually comes down to luck?
The idea that success is driven purely by skill is appealing because it feels fair. If outcomes reflect effort and ability, then success is something we can control. However, in reality, outcomes are rarely that clean. In most situations, results are shaped by a combination of skill and randomness. Even when two individuals have the same level of ability, their results can differ simply because of factors outside their control.
This is where the concept of variance becomes important. Variance refers to how much outcomes can differ, even when underlying skill is constant. In environments with high variance, luck plays a larger role. For example, financial markets are highly unpredictable, meaning even skilled investors can experience very different outcomes. On the other hand, something like a standard exam has lower variance, but randomness still exists in the form of question selection, stress, or even minor mistakes. The key point is that the more uncertainty there is in a situation, the harder it becomes to attribute success purely to skill.
A related concept is regression to the mean. When someone achieves an extremely good result, it is often partly due to luck. Over time, this luck is unlikely to repeat in the same way, so performance tends to move closer to an average level. This explains why a student who scores exceptionally high on one exam may perform less impressively on the next, or why a company that experiences rapid early success may struggle to maintain that level. We often interpret extreme outcomes as indicators of exceptional ability, when in fact they may simply reflect temporary circumstances.
Another reason we overestimate skill is survivorship bias. We tend to focus on successful individuals or companies and ignore the many others who had similar levels of ability but did not achieve the same results. For every successful startup, there are countless others with comparable ideas and effort that failed. By only observing the successes, it becomes easy to conclude that success is the result of superior skill, when in reality it may partly be a matter of being in the right place at the right time.
Understanding the role of luck has important implications. In education, it suggests that a single grade may not fully reflect a student’s ability. In hiring, past success may not always predict future performance. In finance, strong past returns may be partly driven by favourable conditions rather than consistent skill. Recognising this does not mean that skill is irrelevant, but rather that it is only one part of a larger picture.
Ultimately, success is not purely a reflection of how good someone is at something. It is the result of both ability and chance, interacting in ways that are not always visible. Econometrics reminds us to be cautious when interpreting outcomes, and to consider how much of what we observe may simply be the result of randomness rather than true underlying skill.