We, you and I, people in general, have a natural tendency to try to make sense out to the world, to draw lessons from the chaos and the overwhelming amount of data and experiences that we face. Trouble is, we tend to see patterns where there are none and to draw inferences from sets of data that are waaaaay too small for the conclusions to which we are prone to leap.
We tend to fire CEOs after they have had a bad year, saying to ourselves that they have lost their touch, when really much more likely it is just a random fluctuation.
Example: If a superior team can be expected to beat its opponent, on average, 2 out of 3 times they meet, then the inferior team will STILL win a 7-game series (i.e. playoffs) about once every 5 match-ups, i.e. 20% of the time or once every 5 years. (p. 70)
Another way to put it, is that CEOs who are in the top third of CEOs will have a sub-par year, on average, every 5th year. And before you say that being in the top third ain’t that great, think that the odds are 2 out of 3 that you will replace them (assuming a blind choice) with someone not as good! And I suggest you assume a great degree of randomness to the choice of a replacement, because most interview processes are beauty contests where we look for someone who exudes confidence, is like us, shares our values and makes us feel safe, comfortable, and secure. It is difficult to discern true ability.
The “Law of Small Numbers” is not a statistical or mathematical law, but a sarcastic term for the human tendency to assign meaning to sample sizes that are far too small to be reliable.
“Going against the law of small numbers requires character… anyone can sit back and point to the bottom line as justification, assessing instead a person’s actual knowledge and ability takes confidence, thought, good judgement, and, well, guts. You can’t just stand up in a meeting and yell ‘Don’t fire her. She was just at the wrong end of a Bernoulli series.’ Nor is it likely to win you any friends if you stand up and say of the gloating fellow who just sold more Toyota Camrys than anyone else in the history of the dealership, ‘It was just a random fluctuation.’ And so it rarely happens.” (p. 100)
A major component of my job is to a) make correct decisions myself and then to b) bring out the best decision-making ability in others. (Another major part is make sure decisions made are executed well, i.e. good follow-through occurs).
Our decisions are based in large part on how we interpret the world and the meaning we assign to the outcomes we see. “The Drunkard’s Walk” is an entertaining reminder of the need to challenge “natural” assumptions and common conclusions against the hard reality of the laws of probability.