Wealth, Luck and the Power Law

[7Wannabe5]

Happened upon this article which I assume might be of general interest here.

Today we get an answer thanks to the work of Alessandro Pluchino at the University of Catania in Italy and a couple of colleagues. These guys have created a computer model of human talent and the way people use it to exploit opportunities in life. The model allows the team to study the role of chance in this process.

The results are something of an eye-opener. Their simulations accurately reproduce the wealth distribution in the real world. But the wealthiest individuals are not the most talented (although they must have a certain level of talent). They are the luckiest. And this has significant implications for the way societies can optimize the returns they get for investments in everything from business to science.

https://www.technologyreview.com/s/6103 ... st-chance/

[IlliniDave]

I've always respected the saying, "I'd rather be lucky than good."

But I'm always leery of things that imply that outcomes should be equalized ex post. What I didn't get from the article is whether they tried to take into account that some people are very deliberate about wealth accumulation and achieve it, at least moderately/relatively wrt to their environment, without windfalls being a prime contributor; while others make no real effort at all to do so. Unless maybe they are asserting that having the discipline to LBYM and plan ahead is luck.

I did get a chuckle about their conclusions about grant funding. They must not feel they are getting their fair share.

[daylen]

I think the article is too focused on extremes. For the majority, the luck evens out, and so the differences in individual strategy are more predictive. Though, when dealing with medium numbers there will always be uncertainty.

[The Old Man]

Some people win the lottery and some people don't.

[Campitor]

I read the article but not the research paper behind it; I've downloaded it for later reading. I don't believe luck has as much weight as the article purports regarding extreme wealth.

I think anyone trying to surmise how the rich get so rich should read Felix Dennis' book "How to Get Rich": http://a.co/ion3F6G. He repeatedly states that achieving outlier wealth requires a level of dedication that will cost you a life. You'll be a ghost to everyone except your company and bankers.

While I've never hung out with billionaires I have spent time with millionaires on occasion - not the 1 or 2 million type - I'm talking about the 25 to 50+ million type. These people are singularly dedicated to making money at the cost of everything else. Money is not the goal but the scoreboard for whatever is driving them. They are obsessed with making money in the way JLF is driven to maximize ERE; perhaps even more so.

I'm not discounting luck although I prefer to call it opportunity. Obviously opportunity exists on a scale - some are better than others. But how much opportunity is encountered and it's quality, if you live in a western democracy, is on a scale alongside effort and preparation. I define preparation as knowledge+astuteness+openness. I consider effort to be comprised of tenacity, sacrifice, and focused energy. How many people, as a percentage of population, have really put in the maximum effort and preparation to be in the top 20%?

In this WSJ income percentage calculator (2014 numbers) if you earn over 100k, you're in the top 9% of income earners: http://graphics.wsj.com/what-percent/. Do you think earning 100k or more is mostly luck? Perhaps I'm having a moment of cognitive dissonance but I reject the premise of that article.

[7Wannabe5]

But I'm always leery of things that imply that outcomes should be equalized ex post. What I didn't get from the article is whether they tried to take into account that some people are very deliberate about wealth accumulation and achieve it, at least moderately/relatively wrt to their environment, without windfalls being a prime contributor; while others make no real effort at all to do so. Unless maybe they are asserting that having the discipline to LBYM and plan ahead is luck.

My understanding of the model would be that frugality would be one of the parcel of talents initially assigned in Gaussian distribution to members of the population along with IQ, work ethic, determination, social skills, etc. IOW, the initial Talent assignment is assigned as factor that determines how much you are able to make of any piece of luck you encounter along your life path. So, two individuals with the same initial Talent, given the same initial Capital/Success, and no bad or good luck encountered along life path, would end up with same final Capital/Success level. The model assigns a good deal of causality to inherent Talents influencing ability to take advantage of piece of good luck or weather bad luck. For instance, it clearly attempts to model for individual with very low level of inherent Talent being likely to not profit very much from opportunity and vice-versa, but the hither-thither of random luck over time (new roll every 6 months in theoretical 40 year career), results in most of those who are most successful being individuals of only moderate Talent, and many of those with highest inherent level of Talent experiencing below average result of Capital/Success.

Anyways, this model is not highly relevant to ERE since as Daylen noted moderate Talent would still tend towards moderate Capital/Success given reasonable Luck. However, unless I missed something in my skim, I think it is rather interesting that it seems like it would be necessary to show that some aspect of Talent is subject to Power Law in order to refute the model.

[IlliniDave]

I think it is rather interesting that it seems like it would be necessary to show that some aspect of Talent is subject to Power Law in order to refute the model.

Based on their model I have had exactly 0 lucky events in my working life and 1 unlucky event only if you count a divorce, which I don't think is accurate by their definition since even though I came out with less than 1/2, it was more than 1/4. Essentially I have had no luck whatsoever as they define it (or some bizarre dichotomy where I am completely incapable of capitalizing on good luck and 100% capable of avoiding bad luck), and so I don't even exist in their model! Once a person works their way beyond living paycheck-to-paycheck and begins accumulating wealth, doubling/halving events become increasingly rare.

It seems like their definition of luck having such dramatic consequences and frequency may preordain the result. That said, it's not hard to accept that luck may distinguish between occupants of, for example, the far right tail. But I don't think there's any credible argument to be made that Bill Gates and Warren Buffet are just lucky versions of me. It's not hard to make a model that gives the right answer for the wrong reason.

[classical_Liberal]

...

[Sclass]

I like the article but it seems to get into trouble when it starts trying to establish absolutes like luck is more important than skill. IlliniDave was first to point this out.

What I didn't get from the article is whether they tried to take into account that some people are very deliberate about wealth accumulation and achieve it,

I get in this argument with my siblings a lot. They were always singled out as the talented ones in my family and I was always told I’d never be as good as them. And to a large extent it was true as far as talent got distributed. They had all the blue ribbons on their walls and me none. People saw it, I sucked and they were academic rock stars. From our middle school marks to the significance of our PhD theses. They were clearly more talented. And that’s why they cannot seem to accept why I have more money.

Why? That dumbass Sclass. Impossible.

Well because talent and the success around it and money getting are different things. They can be related but they are two distinct things. Talent is what you are. Money getting is the game. My brilliant brother and sister do not apply themselves to efficient money getting outside of a good W2. They try to compare salary to risk adjusted returns from the stock market. Linear vs. exponential phenomena. Two totally different games.

Putting blue ribbons on the wall isn’t always the same as putting dollars in the bank. I’ve met enough poor Olympic medalists IRL to convince me of that one.

The authors are quick to point out wealthy finance people. The authors are probably talented academics at MIT. Two totally different games. With different currencies.

The sad part is I’m still the dumb kid in my family. I just got involved in a riskier game with exponential returns. I failed at their career climbing game that delivered increasing linear returns accompanied with higher taxes and expenses.

The funny part is my brother (a PhD mathematician) wrote a Python program for me that “proved” I was a lucky idiot who beat the survivorship bias. Roll the dice and you get the 1%, the rest become the 99% and it is purely stochastic.

But he’s wrong. The authors and the rest of the 99% don’t pick up the dice in the first place then they wonder why a bunch of rich idiots who happen to be in finance have more money than they do. It’s the participation in the game by talented players.

“Duh I dunno they all seem to be in finance, I don’t know why the coincidence exists?

[Farm_or]

@sclass - thanks for sharing your personal story related to the topic. I don't know how many times that I shared my story with down trodden people trying to give them the message of hope.

The first seventeen years of my career were a tale of two extremes. The first seven years, I worked hard for a corporation and got ZERO breaks. I usually have to supply some details of the sacrifices that I made and the thankless contributions. In return, I got average reviews and minimum raise increases. That treatment made me very bitter and resentful. Rocket fuel!

Eventually, after seven years, there was a catalyst. I found a new job at a new corporation and moved on. The next ten years were extremely different. I applied myself as I did before, but this time, people took notice. I got rave reviews and maximum raises. It was like I could walk on water!

My story and advice to the down trodden was to keep struggling. Don't give up. Keep the odds in your favor long enough for somebody to notice. You can be denied for a long time, but eventually the power of the current will exact its influence on the world.

[7Wannabe5]

I agree that the underlying model does not seem reflective of timing or enormity of lucky and unlucky events. Also, framing Talent as all that is inherent and never-changing, and Capital as all that is subject to change, leaves open the problem of accounting for Capital that is not financial at any juncture in time. For instance, IQ is less well correlated with income than Personal Appearance, but an individual at some junction could choose to exchange financial capital for aesthetic surgery, and thereby from that point forward theoretically garner the increased income associated with improved Personal Appearance. However, it is readily apparent that extreme wealth and personal appearance are not very well correlated, so this would support hypothesis that social boundaries/functions are likely to account for good portion of luck dynamic. IOW, I would suggest that a similar model that had individuals in initial state of equivalent financial capital and inherent talent distribution, but instead of randomly encountering luck, either purposefully avoided interactions with other individuals in the field, or purposefully entered into interactions with other individuals in the field with varying outcomes would result in similar Capital distribution. This would explain why EXTJ s are the most likely to be successful.

[7Wannabe5]

Ah-ha!

I am now reading "Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life, in Organisms, Cities, Economies, and Companies." (Highly recommend!)

Apparently the amount of infrastructure required to provide similar services when a city doubles in size is sublinear at ratio of .85, and the wealth per capita (along with a wide variety of other factors such as disease) scales at 1.15. So, the relationship of talent to wealth accumulation will depend on the relative urbanity of the field of operation.

Heading somewhat off topic, but perhaps relevant to trend of increasing gulf in distribution of wealth...

In 2006 the planet crossed a remarkable historical threshold, with more than half of the world's population residing in urban centers, compared with just 15% a hundred years ago and still only 30% by 1950. It is now expected to move above 75% by 2050, with more than 2 billion people moving to cities, mostly in China, India, Southeast Asia, and Africa.

This is an enormous number. It means that, when averaged over the next 35 years, about a million and a half people will be urbanized each week. to get an idea of what this implies, consider the following: today is August 22; by October 22 there will be the equivalent of another New York metropolitan area on the planet, and by Christmas another one, and by February 22 yet another, and so on...
Inextricably, from now to well until the middle of the century another New York metropolitan area being added to the planet every couple of months. And note that we are talking about the New York metropolitan area consisting of 15 million people, not just New York City, which has only 8 million.

[7Wannabe5]

IOW, especially at the highest levels of inherent talent, the choice to live and work in as big of a city as possible, in as technologically advanced a nation as possible, will likely be very influential in determining ultimate level of wealth.

[classical_Liberal]

...

[trailblazer]

One book I read on business floated that idea that being technically talented was actually a negative factor to business success, because the person would focus too much on the work and not enough on the business, which I think is true.

The most successful people in my profession fit this profile. When discussing clients and projects with them, they are like a live, real-time editor, always shifting the conversation back to the business issues at hand, smoothly blocking derailments into the weeds. They may or may not know the technical stuff - it's just not overly relevant to bringing revenue in the door.