Luck vs. Entrepreneurial Judgment at the Horse Track
Many readers might have missed HBO’s short-lived series Luck, which debuted in 2012. It was a project of David Milch, creator of the brilliant Deadwood, another show unfortunately abandoned in its prime. Despite an all-star cast and A-list directing, Luck was cancelled after only one season due to concerns about animal safety. Short as it is though, it’s still a pretty riveting cross-section of the hidden world of horse racing, shining a spotlight on everyone from the Mafioso owners of the horse track down to the stable boys.
What interests me though is the eponymous theme of luck running through the show. One of my current research projects involves exploring the role luck plays in entrepreneurial success. There are some thorny issues involved in conceptualizing luck and making it operational within economic theory, but there are also some interesting problems in entrepreneurship that we may be able to answer by doing so. For instance, one criticism that has been raised against Israel Kirzner’s theory of entrepreneurship is that the idea of entrepreneurial alertness can be reduced to good luck. If this is true, then the entrepreneurial alertness to opportunities doesn’t explain much about how entrepreneurship happens in the real world. But if entrepreneurship is about more than just luck, then we can in fact think about why entrepreneurs succeed and fail.
One of the few economists to think about luck and entrepreneurship in detail is Frank Fetter. Fetter makes an important point about how prescient entrepreneurial judgment is very often mistaken for simple luck:
Chance therefore has its part [in determining profits]; but the temptation is to exaggerate its importance. Many cases said to be due to chance are found on closer knowledge to be due to superior judgment. They result from the union of happy chance with deliberate choice. The adventurer who, on the discovery of gold, goes at once to California or to Alaska, may stumble upon a gold-mine. It is luck; but he has gone to a place where gold-mines are comparatively plentiful. If he stays at home it is more likely that he will stumble over an ash-heap. Throughout life there is constant opportunity, but it must be sought. One who has the good judgment to be ever at the right time at the place where he has the best chance of finding a good thing, usually gets the advantage, and men call it luck. The more the causes of success in general are studied, the larger is found the element of choice, the smaller that of luck. (Fetter, 1915, p. 360)
In other words, it’s easy to observe a good outcome (such as the profit of an entrepreneur) and dismiss it simply as luck. But any such good fortune can always be thought of in terms of judgmental decision making. “Luck” doesn’t just happen: there is always an element of choice in creating the conditions for what we call good fortune.
Returning to the track, I think it provides an intriguing illustration of the idea that “luck” is often a reflection of entrepreneurial judgment; that is, speculative decision making about the use of valuable resources in the face of uncertainty. Sure, everyone at the track wants good luck, meaning the ability to correctly anticipate the winning horses. But everyone also understands that their own decisions partly determine the meaning of the outcome for them. What matters is effective judgment about the uncertain future: horse owners can hire the wrong trainers or jockeys, bettors can rely on the wrong touts, and even the owners of the track have to be careful to bribe the right officials to keep the track running smoothly. All of these decisions intertwine or conflict as different individuals try to adjust their behavior to the expected outcome. And each plays a significant role in determining the profits and losses of those involved, which are about far more than the mysterious notion of luck. As Fetter points out, it’s only when we look deeper that we see the true causes of success and failure in the economy.
Maybe the best way to put it is to quote the words of Professor Kenobi: “In my experience, there’s no such thing as luck.”