Nassim Taleb has a short paper out entitled “Why It is No Longer a Good Idea to Be in The Investment Industry”. The basic idea is simple, and well understood:
As a population of operators in a profession marked by a high degrees of randomness increases, the number of stellar results, and stellar for completely random reasons, gets larger.
Taleb’s point in this paper is not that if you have a large enough number of operators, then by sheer statistics some of them are going to get lucky. Rather, his point is that as the number of operators rises, it becomes more and more likely that any given outperformer was simply lucky. If you live in a world of fat tails rather than thin tails, and if you have, say, 1 million operators, then the lucky few get very lucky indeed, even if they don’t have any skill.
In numerical terms: in a thin-tailed (Gaussian) world with 1 million operators, the lucky few will be about 5 standard deviations away from the mean. In a fat-tailed world, by contrast, the lucky few will be somewhere between 70 standard deviations and 170 standard deviations away from the mean. Since you can’t get to that kind of place by skill, the result is a world where all the most successful operators are simply lucky.
Taleb concludes with advice: “if you are starting a career, move away from investment management and performance related lotteries as you will be competing with a swelling future spurious tail”. But I’d take issue with this on two fronts.
For one thing, the spurious tail is not swelling. As I examined back in June, the hedge-fund world, just like the mutual-fund world, is shrinking: maybe not in terms of assets under management, but certainly in terms of the number of active fund managers. And as the number of operators shrinks, the spurious tail shrinks as well.
But on top of that, there’s really limited downside to becoming an investment manager. If you get lucky, you can make a fortune; while even if you do badly you still get paid extremely well. Indeed, if you take Taleb to heart, you need to do very little work at all, since your fortunes will be largely down to luck in any case. Lots of money for little work and a small possibility of massive riches? Is not such a bad deal.
The professions you really want to avoid, after reading Taleb’s paper, are not financial but rather creative. Where do you find millions of people all trying to succeed against the odds? Just look at how many bands there are, how many aspiring novelists, how many struggling artists. Nearly all of them think that if they create something great, that will improve their chances of success in their field. But given the sheer number of people they’re competing against, and given the fact that the number of breakout stars in each field is shrinking rather than growing, the fact is that just about everybody with massive success will have got there by sheer luck.
Sometimes, the luck is obvious: EL James, by all accounts, is an absolutely dreadful writer, but has still somehow managed to become a multimillionaire best-selling author. Carly Rae Jepsen has a catchy pop tune, but is only really successful because she happened to be in the right place at the right time. Dan Colen might be a fantastic self-publicist, but not particularly more so than many other, much less successful artists. And so on.
The fact is that pretty much every successful novelist, every successful pop star, every successful artist is successful mainly because of luck. Oftentimes there’s skill involved too, but if you look hard enough, you’ll find just as much skill in the millions of unsuccessful strivers as you do in the tiny set of people who make it huge. And when you’re trying to make it as a novelist, your downside is the kind of penury that no money manager ever needs to worry about.
So if you’re entering the arts world, broadly speaking, make sure that creating something wonderful is its own reward, because you’re almost certainly not going to get much in the way of recognition from anybody else. And if you do get recognition, you’ll only get it because you’re lucky, rather than through any particular skill.