Welcome to the latest in a series of brief interviews with guest experts from KnowledgeBrief’s Innovation Programme, providing a window into the experts’ latest ideas and new advice for executives.
Following the Innovation Day in July, Dr Chengwei Liu (CL), Associate Professor of Strategy and Behavioural Science at ESMT Berlin and Warwick Business School, gave us an interview to discuss his latest insights on how to quantify luck and explore how it can used effectively in business strategy.
KB: What’s the key business challenge that organisations need to address, that your research tackles?
CL: Should we attribute success and failures to skill or to luck? This is relevant to many fundamental questions in business, such as who should a firm hire and promote (or punish and fire). This question is also relevant at the societal level: are we paying, for example, some CEOs too much when many of them are simply at the right place and right time? My research provides a systematic approach to conceptualise and quantify the impact of luck in performances and can help organisations make more informed decisions on this important question.
KB: What advice would you give to executives, based on your findings?
CL: Exceptional performances are usually too good to be true in modern societies. They tend to occur in exceptional circumstances. But instead of attributing these exceptional successes and failures to the situation, we are hard-wired to over-attribute them to the individuals, particularly to those “leaders” involved. My research suggests that one should pay more attention to the “second best”: the high but not top performers in organisations. Their less exceptional performances suggest that the circumstances that enable their high performances are likely not exceptional, making their successes more informative and worth of rewarding, learning and imitating. If organisations continue mistaking luck for skill and rewarding top performers, this encourages excessive risk-taking and fraud because there are no other ways to replicate their luck. These organisations will experience disasters, sooner or later, when their luck runs out.
KB: How does your latest research approach this? What do the results indicate?
CL: My research integrates computational modeling and big data analysis to quantify the impact of luck in performances. The results show the impact of luck is prevalent and much greater than many believe (based on my surveys and experiments on master and executive students I taught). In particular, the most successful musicians, academics, innovators, and public firms are often the luckiest but they often receive the highest level of attention and rewards that they do not deserve. This creates an unmeritocratic society as the richest are not just luckier but systematically worse than the rest.
KB: What did you learn or take away from meeting with the executives at the KnowledgeBrief Innovation Day?
CL: I was very pleased to learn that many of these executives found my findings less counterintuitive than I expected them to think. In fact, they appreciate the impact of luck in performances and found my findings that the top performers tend to be the luckiest are quite consistent with their experiences. One solution discussed in a group I sat in highlighted the importance of introducing and sustaining diversity, which happens to be my current research focus. The reasons are as follows: top-performing executives are the luckiest not because they are incompetent, but because they and their peers are all similarly skilled given that they all survived multiple levels of competitive selections that tend to eliminate low skilled rivals as well as diversity among the survivors. The problem is that their similarly may stifle innovation and changes, which will attract failures to their organisations in the long run. These failures may appear to involve bad luck and timing, but it really results from the way we react to successes. To make organisations less sensitive to luck in order to gain sustainable successes, overcoming the barriers to sustain diversity is the key. I look forward to sharing my research on diversity in the near future!
With thanks to Dr Chengwei Liu (CL), Associate Professor of Strategy and Behavioural Science at ESMT Berlin and Warwick Business School.