Innovation is Not Rewarded

That is, for the innovator. We all benefit from the Pasteurs, the Fords, even the Bill Gates. They create things with spillovers. Yet, you average innovator is simply wrong, hearing dog whistles others don't, and like Van Gogh getting his appreciation after dying, most innovators do their bidding for those they do not know. Deviating from the consensus produces all the things that has elevated us from hunter-gatherers, yet, the record for the individual innovators themselves, is decidedly negative.

Look at any nonfiction bookshelf, and there you will find lots of new ideas, most irrelevant, the rest just wrong. Important new ideas are extremely rare, which makes sense because their marginal cost, after being discovered, is trivial, so they spread. We don't have to independently discover the wheel, crop rotation, or why a Republic dominates a monarchy. If good ideas were discovered all the time, our heads would explode; alas, most weeks, even months, we learn nothing new, and not for lack of trying.

There's an interesting article on whether Liberals or conservatives are smarter in The American. I liked this snippet related to how IQ relates to religiousity:

there would still be a positive correlation between IQ and atheism. The correlation exists not because smart people have necessarily rejected religion, but because religion is the "default" position for most of our society.

This same principle works in places where the default and iconoclastic beliefs are reversed. Japan, for example, has no tradition of monotheistic religion, but the few Japanese Christians tend to be much more educated than non-Christians in Japan. By the logic of someone who wants to read a lot into the Stankov study, Christianity must be the wave of the future, perhaps even the one true faith! But, of course, the vast majority of educated Japanese are not Christians. Just as with atheism in the West, the correctness of Christianity cannot be inferred from the traits of the minority who subscribe to it in Japan.

So, the fact that most atheists in America, who are the minority, are smarter, does not imply that Atheism is necessarily a smarter choice, but rather, that in general elites tend to deviate from the default choice. Eventually, the masses emulate in the elites in subsequent generations, as Christianity or civil rights starts out as the belief of a small vanguard, and then becomes the modal choice of the great unwashed.

In my book Finding Alpha, I define risk as a deviation from the consensus. This is what is implied by a status oriented utility function, because you can always remain in the same spot by doing what everyone else is doing. Taking risk can mean either having zero exposure to the stock market, or double the average exposure; standard exposure is 'no risk'. This is why risk, and return, are not correlated empirically (see videos here, read book here).

I personally have known a lot of really smart people and have to say they are more unconventional in their ideas, yet most of their ideas are crazy. If you have ever been to a Mensa meeting (IQ but little formal education), you realize how things like homeopathy, or truthers, get their bearings. If you have ever hung out with PhDs, you know how limited their competence scope is (at research universities they have the same IQ as Mensans, but are more disciplined and less creative). It's no wonder guys like stereotypical MBAs, who are not so analytical but rather personable and articulate, tend to dominate society. I suspect MBA rule is less catastrophic than PhD or Mensa rule, if only because they aren't as certain of themselves. This all gets back to the idea there is an optimal IQ, and it's not 180, but rather, say, 125 (probably the modal IQ for any large group leader, such as Presidents and CEOs).

Being smart is a good thing, and I'm happy when my kids do well on cognitive tests because of what this portends for their life (as Charles Murray noted, most people would prefer their kid had 15 more IQ points than get $1 million on their 21st birthday). Yet highly intelligent people tend to innovate more, and such innovation tends to be counterproductive for the innovator. So, the fact really smart people can answer a question faster or more accurately than others, is at some point offset by the fact that when they have to supply the question--as is the case once they leave formal schooling--they will be attracted towards less conventional, usually irrelevant or wrong, paths. For every Steve Jobs or Albert Einstein there were many who lived and died in obscurity; for every Black-Derman-Toy there are hundreds of insanely convoluted, in-house models, of no value.

So, if you attempt to innovate, take pride that you are doing it with blatant disregard for your narrow self interest. Objectively, you will fail with a high probability. Like thinking about the lottery, there are happy delusions of grandeur considering your improbable future success. You can counter those who say, you should be feeding orphans in an African village, in that your efforts have large positive externalities. Most importantly, it's fun.