Thursday, August 19, 2021

I Must Not Be Lucky!

Whether this is true or not, it makes for interesting reading:

The distribution of wealth follows a well-known pattern sometimes called an 80:20 rule: 80 percent of the wealth is owned by 20 percent of the people. Indeed, a report last year concluded that just eight men had a total wealth equivalent to that of the world’s poorest 3.8 billion people.

This seems to occur in all societies at all scales. It is a well-studied pattern called a power law that crops up in a wide range of social phenomena. But the distribution of wealth is among the most controversial because of the issues it raises about fairness and merit. Why should so few people have so much wealth?

The conventional answer is that we live in a meritocracy in which people are rewarded for their talent, intelligence, effort, and so on. Over time, many people think, this translates into the wealth distribution that we observe, although a healthy dose of luck can play a role.

But there is a problem with this idea: while wealth distribution follows a power law, the distribution of human skills generally follows a normal distribution that is symmetric about an average value. For example, intelligence, as measured by IQ tests, follows this pattern. Average IQ is 100, but nobody has an IQ of 1,000 or 10,000.

The same is true of effort, as measured by hours worked. Some people work more hours than average and some work less, but nobody works a billion times more hours than anybody else.

And yet when it comes to the rewards for this work, some people do have billions of times more wealth than other people. What’s more, numerous studies have shown that the wealthiest people are generally not the most talented by other measures.

What factors, then, determine how individuals become wealthy? Could it be that chance plays a bigger role than anybody expected? And how can these factors, whatever they are, be exploited to make the world a better and fairer place?

We finally 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.

1 comment:

Ellen K said...

Accruing wealth comes down to life choices. For example, a woman who has a child out of wedlock is far more likely to drop out of school and live in poverty than one who graduates and gets further training. In the same manner daily habits can be costly. It's hard for me to feel sorry for someone living below the poverty level when the smoke, drink, use drugs, get their nails done weekly, buy expensive shoes instead of saving money and deferring their Wants to later down the road. It's the Wants vs. Needs dilemma. Oprah urged people to buy stuff because. they "deserve it" not because they could afford it. All these pay day loan and check cashing services didn't come about because nobody uses them. If you're always buying designer label name brand, or eating out rather than brown bagging lunch, you're choosing to spend money you may not really possess. I heard that Warren Buffett still lives in the house he bought decades ago for $30K. While I'm sure he added some amenities, the concept of fixing something over buying new is something quite alien to most people.