Superstars: Talented or merely lucky? The effect of competition on rank-based talent attribution

44 Pages Posted: 1 Oct 2019 Last revised: 26 Jul 2021

See all articles by Thomas H. Noe

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Dawei Fang

University of Gothenburg - Center For Finance; University of Gothenburg - Department of Economics

Date Written: July 22, 2021

Abstract

We characterize the relationship between talent, luck, and successful performance in highly competitive environments. We show that in many plausible settings, world beating performance is a rather weak signal of underlying ability. For many standard statistical distributions, competition cannot identify talent, i.e., as the number of competitors increases without bound, the probability that the best performer is talented is bounded away from one. When performance equals ability plus Normally distributed noise, competition can identify talent. However, the probability that the best performer is talented increases so slowly with increased competition that, for plausible signal/noise ratios drawn, for example, from the empirical literature on mutual fund performance, confident attribution of talent to the best performer is impossible under any practically conceivable scale of competition. Increased competition need not even favor talent, i.e., increase the probability that the best performer is talented. We provide sufficient conditions both for competition favoring talent and for competition favoring luck. Using these conditions, we show that, in a fairly natural setting---a single-shot forecasting contest where a forecaster's performance is measured by her accuracy and a forecaster's ability is measured by the precision of her Normally distributed information signal, competition favors luck. In other words, increasing the number of competing forecasters always reduces the probability that the most accurate forecaster is talented. In forecasting contests, besting one rival in a two-shot contest provides a stronger signal of ability than topping an arbitrarily large number of rivals in a single-shot contest.

Keywords: contest, selection, talent attribution, mutual fund tournament, forecasting competition

JEL Classification: D81, D82, J24, M50

Suggested Citation

Noe, Thomas H. and Fang, Dawei, Superstars: Talented or merely lucky? The effect of competition on rank-based talent attribution (July 22, 2021). Available at SSRN: https://ssrn.com/abstract=3456646 or http://dx.doi.org/10.2139/ssrn.3456646

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Dawei Fang (Contact Author)

University of Gothenburg - Center For Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

University of Gothenburg - Department of Economics ( email )

Sweden

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
388
Abstract Views
2,161
Rank
139,877
PlumX Metrics