Economist Writing Every Day

I agree with Tyler’s assessment that the top performers in pretty much any field of endeavor tend to be incredibly intelligent, regardless of whether that field is broadly associated with intelligence per se. He closes with an open question: in what fields can success belie intelligence?

The older I get, the more complex and messier I find intelligence to be as a construct. If we broaden the concept from intelligence to “competence” or “capability”, however, I think it becomes an even more interesting question. In what fields can we expect to observe top performers who are, in actuality, objectively bad at their jobs?

This is not to say I that I believe there are any fields or jobs where success doesn’t positively correlate with capability. Rather, it is to ask in what fields, if any, is the variance on outcomes is so great as to be able to fully obscure average or expected outcomes within individuals? Framed this way, the fields we should be looking for are those that emphasize high leverage, high risk wagers made with low frequencies. If you’re trying to identify ostensibly high-performers who are, in reality, grossly incompetent in the fields that made them wealthy, look for a series of ex ante negative expected value wagers combined with large initial endowments and foolish leverage ratios. Probalistically most such individuals will be punished accordingly, but given enough players, a highly visible few will hit big with an initial sequence of winners. Their subsequent anointment as virtuosos combined with the sheer weight of their capital will permit them to coast for decades before, if ever, their underlying incompetence catches up with them.

As for specific fields, it’s pretty easy for me to see such dynamics at play in real estate and angel investing. Not to be confused with construction or venture capital, in which “wagers” are made with much higher frequency, lower risk, and, in turn, lower returns on investment. Success in such fields reveal competence for the same reason it reveals them in professional poker: the law of large numbers eventually comes for everyone. Real estate speculation, on the other hand, whether its developed or undeveloped properties is exactly the kind of field where otherwise incompetent boobs, if given a large enough initial endowment and the opportunity to leverage to the hilt, can become giants on the heels of a relatively small number of bets. If they were in the right zip codes for the last few decades, it’s entirely possible to turn a half million into a few billion, without any insight in the slightest. Angel investing, on the other hand, tends to be less about leverage than simply buying lottery tickets: negative ROI, but in a landscape of thousands of angel investors, most of whom will experience losses approaching 100% on their portfolio, someone will fall into a 5000x return on something originally coded in a dorm. To be clear, more capable and competent investors will on average perform better speculating in real estate and early stage start-ups, but the absolutely biggest winners will be chosen more by chance than talent.

A similar question we might ask is what are the fields where the quality of outcomes is orthogonal to the capability being ostensibly being selected for? Allow me to explain through a standard scam story. A stock broker cold calls 100 people, tells each his pick for the week, half he says Stock A will go up, half he tells Stock A will go down. He then calls back the 50 people he correctly prognosticated to. He repeat this several times, until there are 3 people who believe that this previously unknown stranger has correctly predicted future stock prices 5 times in a row, a feat that seems unlikely by chance. Customers think the quality they are observing is forecasting expertise, when in actuality it is the ability to spend 60 hours a week being energetic and charismatic on the phone with strangers. This is, unto itself, a rare ability, just not the one that the customers in question think they are observing evidence of. Related to our earlier story, a strong argument can be made the most important skill in real estate speculation isn’t forecasting, but gaining access to leverage i.e. convincing people to loan you enough money that you can particpate in a casino with a such a high minimum stake.

The moral of the story is we should take care when attributing success to narrow capability or competence. Sometimes it’s because of selection on observability, obscuring the role that luck has played in success. Sometimes its because success demands obscuring the criteria on which it is selected, whether because of legality or simple social disapprobation. We should be doubly careful when considering fields/sectors where success remains somewhat mysterious or even magical. When observers are consistently attributing success to intangible factors, whether its charisma in politicians, inspiration in coaches, instinct in investors, or genius in futurists, your antennae should raise. If we don’t really know why and how someone succeeds, then there is a decent chance they don’t know either.