Luck and skill have a role to play in investment success

For goal-based portfolios, it is better to invest in bank deposits where the maturity value is known

A well-known dictionary defines luck as ‘a force that brings good fortune or adversity.’ Individuals typically attribute success to their skills.

The behaviour of attributing success to skill and failure to bad luck is called self-attribution bias. In this article, we discuss how such biases shape our attitude towards luck in our personal finance.

If skill is all it takes to be successful, why are many not-so-skilful individuals rich and why are so many brilliant and skilful ones having a boring day job?

It is natural to attribute success to skill and hard work, and failure to laziness, especially when the latter relates to someone else. The fact is that luck is an integral part of everyone’s success. You could become overconfident when you suffer from self-attribution bias, taking more investment risk than is required. Self-attribution bias also leads to hindsight bias.

This refers to our behaviour to look back at your decisions and believe that the events were predictable. Hindsight bias could prompt us to attribute a successful outcome to our skill of having predicted the event correctly.

The issue is that luck has two sides. Risk is the possibility that your seemingly good decision can have an adverse future outcome (bad luck?).

Good luck (often attributed to skill) is when a seemingly bad decision turns into a positive outcome. The point is that we rarely consider a decision as bad when we experience a positive outcome. So, the role of luck is rarely acknowledged in investment success.