How to tell luck from skill

Wearing a suit and a tie – there is no way to find a flaw. Or as the German saying goes: “Kleider machen Leute”. “Clothes make the man.” This pair of men and clothes is mirrored by another pair: the unlucky gifted thirsting in poverty and the lucky stupid bathing in wealth. What is it that makes such particular example so general? How is this generalization established in a way that no alternative could be considered?

So why do we (tend to) welcome an experiment like the following undertaken by Jordi Brandts at Autonomous University of Barcelona? Subjects were fourth year finance undergraduates at one of the best universities in Spain. They were tapped regarding their ability to tell luck from skill. For this they were presented a group of students to predict a sequence of five coin tosses. That accomplished left two students: the best and the worst predictor. Now our finance undergraduates had to bet. They had “to bet on whether the best and worst predictor could predict another five coin tosses. The subjects were told that they would bet on the worst predictor from the first round, unless they paid to switch to the best predictor.” How would you have decided? Well, our deplorable finance undergraduates, to be precise: 82% of them, “paid to make the switch.” Thus spending money utterly and simply on luck not realizing it as such, but thinking it to be skill.

So, will you trust your suited up financial consultant? Or will you subject him to test? And why?

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