A normative theory of luck

Abstract

Psychologists have identified heuristics and biases that can cause people to make assumptions about factors that contribute to the success of individuals and firms, whose outcomes may have actually resulted primarily from randomness. Yet the interpretation of these biases becomes ambiguous when they represent reasonable cognitive shortcuts that offer certain advantages. This paper addresses this ambiguity by presenting four versions (weak, semi-weak, semi-strong, strong) of a normative theory of luck that integrates insights from psychology with the chance model approach to predict the circumstances under which performance non-monotonicity occurs: higher performance may not only indicate greater luck, but also lower expected merit or quality. The semi-strong version is illustrated by examining the decoupling of citations of academic publications and their impact, illuminating when higher citations indicate lower quality. We conclude by discussing the broader implications of a normative theory of luck, emphasizing strategies to address situations where people mistake luck for skill.