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it certainly doesn’t eliminate it. In addition to averaging performance over an extended period, therefore, another way to try to differentiate individual talent from luck is to index performance relative to a peer group, meaning that a trader working in a particular asset class—say, interest rate swaps—should receive a bonus only for outperforming an index of all traders in that asset class. Put another way, if everybody in a particular market or industry makes money at the same time—as all the major investment banks did in the first quarter of 2010—we ought to suspect that performance is being driven by a secular trend, not individual talent.

Delaying bonuses and indexing performance to peers are worthy ideas, but they may still not solve the deeper problem of differentiating luck from talent. Consider, for example, the case of Bill Miller, the legendary mutual fund manager whose Value Trust beat the S&P 500 fifteen years straight—something no other mutual fund manager has ever accomplished. Over this period, Miller’s success seems like a textbook case of talent trumping luck. He really did outperform his peers, year after year, for fifteen years—a winning streak that, as the investment strategist Michael Mauboussin has shown, would be extremely unlikely to have occurred in the historical population of fund managers if everyone were tossing proverbial coins.9 At the end of his streak, therefore, it would have been hard to dispute that Miller was doing something special. But then, in the three-year period from 2006 to 2008, right after his record streak ended, Miller’s performance was bad enough to reverse a large chunk of his previous gains, dragging his ten-year average below that of the S&P. So was he a brilliant investor who simply had some bad luck, or was he instead the opposite: a relatively ordinary investor whose ultimately flawed strategy just happened to work for a long time? The problem is that judging from his investing record alone, it’s probably not possible to say. Just as Michael Raynor explained for business strategies, like Sony versus Matsushita in the video war described in Chapter 7, investing strategies can be successful or unsuccessful for several years in a row for reasons that have nothing to do with skill, and everything to do with luck. Naturally, it won’t seem like luck, but there is no way to know that whatever story is concocted to explain that success isn’t simply another manifestation of the Halo Effect.

To be sure that we are not just falling for the Halo Effect, we really need a different measure of performance altogether—one that assesses individual skill directly rather than by inferring it from outcomes that might be determined by forces beyond the individual’s control. At the end of his streak, Miller was compared a lot with Joe DiMaggio, who had a famous hitting streak of fifty-six consecutive games during the 1941 baseball season. Superficially, the streaks are analogous, but in DiMaggio’s case, we also know that his career batting average was 0.3246, which is the 44th highest in baseball history, and that during the time of the streak it was an astonishing .409.10 So although there was still an element of luck in DiMaggio’s streak, his skill ensured that he was more likely to be “lucky” than most other players.11

Ideally then, we would like to have the equivalent of a batting average to measure performance in different professions. But outside of sports, unfortunately, such statistics are not so easy to put together.12 The reason is that outcomes in sports are generally repeated many times under close-to-identical conditions. A baseball player may have six hundred at-bats in a single season, and many thousands throughout his career, each one of which is, roughly speaking, an independent test of individual skill. Even for more ephemeral skills, like outstanding positional play in professional basketball, that are harder to measure directly but still help the team win, we have almost one hundred NBA games each season that we can watch to observe a player’s effect on his team and