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    Success = Talent + Luck

    Fatih Özatay, PhD19 November 2013 - Okunma Sayısı: 1501

    Does Turkey implement any anti-inflationary policy that we expect a “permanent” drop in inflation rate?

    ‘Success = Talent + Luck’ ‘Great success = a little more talent + a lot of luck’.

    Years ago, the editor of a journal asked a group of scientists to write down their favorite equations. The ones above are Nobel economy prize winner psychologist Daniel Kahneman’s favorites.

    On Saturday I talked about Kahneman’s book Thinking, Fast and Slow. In the chapter titled “Regression to the mean” he impressively illustrates how we earthlings ignore the role of luck in success (or failure) and try to find causal explanations to success of failure stories we hear. His first example is from the time he taught flight instructors in the Israeli Air Force. He was telling at a conference that rewards for improvements in performance worked better than punishment of mistakes. At the end of his speech, one senior flight instructor took the floor and said: “On many occasions I have praised flight cadets for a clean execution of some aerobic maneuver. The next time they try the same maneuver they usually do worse. On the other hand, I have often screamed into a cadet’s earphone for bad execution, and in general he does better on his next try. So please don’t tell us that reward works and punishment does not, because the opposite is the case.”

    Kahneman stresses that the instructor’s observation was right: a successful maneuver followed by an unsuccessful one. Yet, he emphasizes, concluding that praising a performance would be give way to a poor performance the next based on a single observation is wrong. Naturally, he says, the instructor praised a cadet who was far better than the average and who was most probably extremely lucky in that one case. Given the fact that he will not be as lucky the next time, his performance would be worse the next time no matter if he was praised or not. Regression to the mean, it is! Please note that he does not disregard talent. He just stresses that it is but normal that an extraordinary performance is followed by an average one, given the role of luck in success.

    He offers some more examples from sports. It is difficult to digest after first time you read it. In fact, that’s the very point to which Kahneman draws attention. He says that we are prone to constructing causal relationships and neglecting the simplest statistical facts. He underlines that it was for a reason that the concept of “regression to the mean” was discovered two centuries after the discovery of gravity and advanced differential mathematics. Now, let’s adapt Kahneman’s equations to inflation:

    ‘A change in inflation = A change in economic policy + luck’. ‘A major change in inflation = A little more change in economic policy + a lot of luck’.

    Think about it: if you are not implementing an economic policy measure that will alter the status quo (increase or decrease inflation), changing inflation (having a rate above or below the average) depends on luck. Bad luck: energy prices up, unpleasant weather, unexpected tax raises. Good luck: energy prices down, pleasant weather, no unexpected tax raise. Then, the question is: does Turkey implement any anti-inflationary policy that we expect a “permanent” drop in inflation rate?

    This commentary was published in Radikal daily on 19.11.2013