Tuesday, November 01, 2011

Chance, Effort, and Ability

Here's my local paper's Sunday major opinion piece on wealth inequality, discussing a researcher's model of wealth distribution:
He began his research with a simple question: Can chance alone account for wealth concentration?...He assumed that all entrepreneurs began with equal wealth. Returns varied, solely by chance...I'll spare you the calculus, but according to Fargione's model, by the "inexorable effect of chance," and chance alone, "a small proportion of entrepreneurs come to possess essentially all of the wealth...According to Fargione, greater variation in rates of return hastened the concentration of wealth.

That's not a model, that's an assumption. He assumed individual wealth varies randomly, and found the net inequality will be due to randomness. I understand that assumptions drive models, but the step between assumption and result has to be a little subtle or non-obvious. Here, he assumed everyone varied by randomness, and after doing this in Excel (really), it implied variation by chance is really random.

While it's important to remember that assumptions aren't models, they are perhaps more important, because as Darwin said,
False facts are highly injurious to the progress of science, for they often long endure; but false views, if supported by some evidence, do little harm, as every one takes a salutary pleasure in proving their falseness.

People who get excited about wealth being explained solely by effort or chance are making an important assumption about navigating one's life. Success is the result of randomness, effort, and ability. If you omit one of these, you will be miserable. A lot of growing up is about finding what you like that you are good at, and usually you like things you are relatively good at. Then practice that skill until you become excellent at it. The rest you can't really worry about even though that too is important, especially in explaining things like why certain people are really rich, which is often being in the right place at the right time. This should make us content because it's all we can control.

Anxiety should be not be ignored, but seen as what incents us to do our best--to observe the Serenity Prayer--because we worry all the time if we are doing our best given an uncertain future (in the end, it's the doers that prosper). For the existentialists Kierkegaard and Heidegger, this anxiety is the essence of consciousness (or sein), because we exist in time and are always thinking about an uncertain future in a way animals do not. They had very different solutions to this problem, and while I tend to find Heidegger's solution more fruitful, it clearly has more potential downside (Kierkegaard chose faith in God, Heidegger became an enthusiastic Nazi).

It's sad that some people see the disparities in income, and think this is all effort or all luck. In any case, this is a more damaging belief for their own self-actualization than any silly tax policy they envisage.


Troy Peterson said...

Great post, as always. You eloquently framed the key element missing from both sides of the rabid debate.

On the other side of the debate, recent viral blogs purportedly representing "the 53%" that pay tax utterly ignore the positive impact that chance and (perhaps) higher intelligence has played in their lives. Rather, they frame success as entirely owed to their hard-work and strong ethics (they sound like Wall Street traders!).

As your post lays out, the interrelationship of all three elements is critical. Nicely written. Troy

Mercury said...

“He assumed that all entrepreneurs began with equal wealth. Returns varied, solely by chance.”

So, whether you make a crappy product that no one wants or one that people will line up around the block for…its just dumb luck if your subsequent returns end up being big or small? With assumptions like that you don’t need to build a model. If your study gets fawning attention in the StarTribune is that mere chance too?...or might you be selling something they’re eager to buy?

It’s hardly news that one of the easiest ways to make a large fortune is to start out with a small one but that doesn’t mean the original small fortune was accumulated mostly by chance. I dare Mr. Fargione to do a study on which kinds of people tend to compound multi-generational wealth and which kinds tend to blow it before the end of the first. Then, try and sell the results to the StarTribune editorial board.

Anonymous said...

What was Heidegger's solution?

TD said...

I am probably diving in deeper than my ability in statistics would warrant, however, here goes:

In a model like this, wouldn't the assumption that future results are random actually be quite accurate? It is very difficult to predict which entrepreneurs will be successful at the start of their ventures. In fact, accurate predictions about this are probably indistinguishable from pure chance (on a statistical basis).

Would you have predicted that the guy who came up with the idea for Silly Bandz would be fantastically wealthy today? Probably not.

I would guess also that if you reversed the question and said, "prove these successful entrepreneurs did not succeed just because of chance", you would never be able to statistically prove that.

Eric Falkenstein said...

Kierkegaard overcomes anxiety by faith in god. For Heidegger, this is the beginning of anxiety, he leap of faith. For Heidegger, it is to take responsibility for yourself, ‘anticipatory resoluteness’ of one’s mortality, and do something ‘authentic.’ It opens the door for a lot of things--stoicism, Nazism--because you can say people making a fully conscious, individual choice to plough the field, work as a prison guard, are authentic choices. Both solutions, I think, are daft, but at least they are addressing an important question. I think it’s important to recognize anxiety as a part of human consciousness, and the solution is pragmatism (finding one’s comparative advantage, seek to build relationships and things of excellence).

James said...

The method is fine. It's the interpretation that went wrong. The right interpretation is that inequality is unavoidable except in cases where variations in wealth are non-random. This means ther are really only two options: either someone plans the economy down to individual salaries, or we accept that inequality is inevitable.

If the researcher had assumed a non-random pattern of variations in income, that would have to be justified vs some other non-random pattern of variations.

Wisdom Seeker said...

James, we do not need to accept the current historically high (and, historically, unsustainable) level of wealth and income inequality, and we do not need micromanaged salaries to fix the problem either. Your lack of imagination is distressing:

"This means ther are really only two options: either someone plans the economy down to individual salaries, or we accept that inequality is inevitable. "

I can think of at least 10 other alternatives in which variation of wealth becomes non-random, without having to invoke socialist micromanagement of individual salaries. There are many ways to put the Gini back in the bottle.

For a good start, one might look at 1950s tax policy and the consequent distribution of income and wealth. One could also look at any number of other countries or historical periods.

Finally, there is very clear evidence that a significant amount of wealth inequality is generated by financial fraud and unbalanced power. I think it's very difficult to justify CEO payouts of over $10,000,000/year for corporations that are LOSING MONEY within profitable industries, for instance.