How managers and leaders misinterpret chance events

We all know that a “fair” coin, when flipped, has a 50:50 chance of coming down heads or tails. So what will happen if you make the experiment and flip one, say, ten times in a row?

If you guessed that you would get heads five times and tails five times, you are very likely to be wrong. The real answer is that you have no way of knowing. It might return nine heads and one tails, or the reverse — or any combination, up to and including ten straight heads or tails.

Of course, if you got heads ten times in a row, people might wonder if the coin or the flip was truly fair — and they might be correct in their dark assumptions about what you did, if you stood to gain by such a result — but there is no reason why such an outcome should be any less random that getting the “expected” five heads and five tails.

Being fooled by sample size

The reason, of course, is sample size — or, in many cases, time. Ten flips is simply not sufficient to demonstrate the true effects of random flips with a fair coin. If you went on flipping longer — maybe a hundred flips, or a thousand — you would be more likely to get a result close to the “random” 50:50 spread.

It’s an obvious matter to point out, but no less important for that.

Patience and time are in short supply today. People want results quickly and they have little appetite to wait around to see what happens if some action or assumption is tried out more than a few times.

As a result, they find themselves constantly judging outcomes on the basis of very small samples: perhaps no more than one or two.

Take the fashionable nonsense of “industry best practice.” Of course, what this means is nowhere near what the words imply. Who has the patience — or the time — to survey a huge sample of practices within an industry to check out what is being done; let alone wait for maybe ten years or more to see the true results of each one?

What it is in reality is the mindless following of whatever business currently seems to be making most money or achieving greatest popular success.

That’s the equivalent of valuing heads more than tails in a coin flip, then noting that one person threw eight heads out of ten and copying whatever he or she appeared — or claimed — to be doing at the time — perhaps whistling “Dixie” or wearing blue pants. Within weeks, “Dixie” whistling is compulsory throughout an industry and the manufacturers of blue pants see their profits climb to stratospheric levels.

The superstitious manager

Another powerful force in making fools of otherwise intelligent people is superstition: the tendency to assume — often wrongly — that something unusual must be significant.

To go back to our flipping of that coin, it would be very easy to jump to the conclusion that getting heads ten times in a row was not random at all; that it “meant something.”

Humans like meaning and don’t like randomness. After all, if you can ferret out the meaning in something — if you can understand what caused it — you can perhaps control or influence it in your favor. Random is simply . . . well, random. It can go either way and there’s nothing you can do about it.

People also like to take credit for favorable outcomes. Suppose you wanted to get heads and you did — ten times out of ten. Wouldn’t you happily bask in the applause and accept that, after all, the fact that you were flipping the coin did have something to do with it? Even if you simply said that you must be lucky?

Coin-flipping isn’t the basis of a career, but taking risks in investments certainly is. So when certain people began to see those risks fall out the right way, time after time, they definitely believed that it had a lot to do with their ability — and made sure others believed it as well. Who is going to turn around in such a situation and note that it could very well have been entirely due to random fluctuations in the long-term progress of the market? Who would admit to having little or no real idea of what the actual risks were, or why he or she was taking them — save that everyone else was doing the same?

Now, when so many of those risks have gone bad, the world is full of wiseacres pointing to the obvious: that buying risky investments you don’t understand is the act of a fool.

I would even go further. If doing that is the basis for earning millions of dollars, then I want to state, right know, that I am eminently well-qualified for the task. I am certain that I could buy and sell risky investments, based on total ignorance, as well as anyone else. Who knows, I might even get ten heads out of ten — for a while.

Random is always random

Much of our world, including the business world, is governed by random processes. Odd and striking results — ten heads out of ten — can happen at any time, but most often mean nothing. The sample is too small. We haven’t allowed enough time to pass to judge whether what we think produces good results actually does so in a variety of different conditions. They make no difference to the randomness of the event, viewed in a proper perspective.

Today you’re a hero; tomorrow you’re seen as a crazy for doing the exact same thing. It’s all fashion and superstition. Meanwhile, the true driver of events — randomness — moves on unaltered.

Many, many of the worst mistakes in the world of business are due to the simple process of being fooled by randomness; seeing something happen and attributing the cause to something people did, or claimed to have done, when the true reason was blind chance. Repeating some folk wisdom or management mythology and failing to notice that there was never any true evidence to support it outside a small, short-term sample, often taken in circumstances long past. Erecting some temporary result into an unalterable law of business success.

The true value of slowing down

The real value in slowing down is that it allows you to collect more evidence to support or refute any belief, so you are less likely to be fooled by random events. It helps put things into a proper perspective, so that odd, but still completely chance events are show for what they are. It lets fashions pass and circumstances change, revealing what works in many situations and what only worked in one.

For centuries, age and experience were valued as a source of precisely that kind of wisdom: not based on intellect, but on having been around long enough to recognize the continual shifting of randomness at work. Only in recent decades, and in predominantly Western cultures, has youth become so highly prized and older people relegated to homes, where that can molder away out of sight.

Of course, when you’re young, the last thing you want is some old fart telling you that your brilliance is based on nothing more than luck, and your tremendous insight into the causes of some odd event is nothing more than fantasy and superstition. And by the time you’re old, what you have learned is generally dismissed as out-dated and useless.

Modern life may be speeded up, compared to the past, but that’s the only difference. Randomness is still randomness, and making decisions faster and faster merely adds to the problem of small samples and allowing too little time to pass to see the true outcome.

If we all slowed down to the pace of the elderly, we would see more and see it better.

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