[FRIAM] Nautilus: Investing Is More Luck Than Talent

[Eric Smith]

Robert and Marcus, good morning,

Robert, your original thread is a fine one, and I sort-of know Moshe Levy, though not closely.  The thread deserves orders of magnitude more and better attention than I can give it, so apologies in advance for shallowness in the following, or failing to make full use of the material you have provided.

It seems to me that what makes this question interesting, important, and actionable, is the role that definite social structures can play in outcomes.  In any simulations like Levy’s, one can make a model of a set of events, and then describe outcomes of that event-model, such as the dominating role of the “luck” of initial conditions.  All good to do that.  But another question is how one chooses to view the model as an instantiation of certain abstractions, and here there can be important choices.

Economics, including much of what complexity people do (particularly those in finance) are heavy on the idea of negotiated contract and weak on the idea of Power and its role.  Power can be anything that, either explicitly or in real-life-pragmatics, fills in gaps where idealized negotiation is either absent or practically unachievable.  Hence power is pervasive and can result from enormously indirect and long-tailed causes.  To the point of this conversation, it seems like crucial sources of power related to wealth divergences are _access_ (on one side), and _constraints_ (on the other).  There are many other asymmetries, of information and skill sets (human capital in various denominations), time and computational capacities (both formal and informal) that one could add to the list.  The enumerations of power, its forms and consequences, is probably a much larger and richer potential area for hopeful-future-science than economics is, because power is fundamentally a more diversified concept than contract.  Yet whereas economics likes to think of itself as approaching a science (more deserved in a few areas than in almost all the rest), the study of power is still very rooted in “scholarship”, and lives in a world more of narrative and essay sometimes bolstered by some numbers, than in any world where systematic formal analysis could be said to have added much to understanding.  

But to mechanics:

Access: having wealth changes the budgets of time, of social network, of centralization so you can take little commissions on lots of things created by publicly-funded joint resources (roads, schools, police, etc.).  All these points were made by Obama and Elizabeth Warren and others in many public dicsussions that circulated on this list in past years.  The general tenor of those messages, which I think is largely right, is that when you are a capital owner, wealthy, well-networked, and a middle-man in the productive labor of many others, you have the ability (within the law, and often within social norms), to take individually-tiny but vastly numerous benefits from the social infrastructure, which others further outside in the periphery of the network cannot take.  This is a source of the positive feedback by which wealth breeds access, and access opens selective doors to further wealth.  It seems an easy first-order explanation to the question often posed rhetorically: why do bankers garner vastly greater wages than homebuilders or other tradesmen, whose real contribution could be considered of comparable value and whose skills and effort are also comparable.  It’s not that people need bankers more, but that more people need bankers to some degree, and the greater centrality of their position creates a structural power asymmetry.  A similar thing can be said for people on coasts (and to a lesser extent along interior waterways), who are middle-men in ocean- (or river-) borne trade, or manufacturers as middle-men between raw materials suppliers and final-product consumers, or city dwellers whose use of infrastructure is denser and who therefore have economies of scale not available to rural residents.  Many of these topics are discussed in fairly standard form in some of Paul Krugman’s early books on economic geography as a source of lock-in.  I don’t think I am contributing any new insight here, but the point still seems to me far more important than the productive use to which we have been able to put it so far.

Constraint: this is the opposite side of the coin from access.  Its most conventionally treated forms are lack of access to capital and credit.  Hard boundaries of the kind that come from limited capital and credit access turn what would be a probability distribution over options for a wealthy person into a kind of pin-ball careening from crisis to crisis, for the constrained.  I have wanted, for years, to write down a simple model to check my intuition that this shortening of options which effectively shortens decision horizons, makes an inevitable ratchet for those who are less constrained, to always win on average over those who are credit- and cash-constrained.  (I have a quasi-model with Duncan Foley several years ago which shows a version of this, but it doesn’t add much to understanding any important question here.)  It isn’t illegal, per se, for each person to push hard for the best bargain for which he can find a counter-party, but it is a structural power asymmetry that the same people keep getting the worse end of almost-every deal, and it pushes them over time into corners from which they have no escape.  So clearly the law is not sufficient to protect against a near-certain instability.  Economists like to talk about cash and credit constraint because it is easy to measure and model, but one could say the same thing about constraints on time and attention (3 jobs; who has time to be careful about the news?), education and experience (the most effective way the republicans can hollow out the middle of the country and herd the populace into sheep-pens to be carved up is to defund and oppose basic education at every turn), and social network.

Marcus, some months ago I made a comment about “emptying hearts and stuffing bellies”, to which you replied with perhaps skepticism, or at least a statement that I hadn’t made a clear case for something.  I meant something along the lines of the foregoing paragraph, the awareness and accurate description of which is also present in most of your posts.  I dislike the closed-mindedness and willful ignorance of groups I grew up in, probably in a very similar way to the way you do.  But I don’t think that kind of thing flowers as it has, when societies are evolving to make a good life better; more like it grows where people are making an unsatisfying life somehow more tolerable to plough on through.  So seriously and productively understanding the structural asymmetries that do constantly push wide swaths of people down, and figuring out how to get the public as a whole to make commitments to fix that where possible, was the intent of the “stuffing bellies” comment.  Reduce the drivers to discontent, as a way to reduce the feral cultural offspring of discontent.  I do think that things like trade deals appear in the conversation on exactly this point, because they can be one of the mechanisms by which a ratchet, driven by several factors, contributes one of the mechanisms of asymmetric access and increasing inequality.  But trade deals are infinitely complicated and need a thread of their own, because they exist at an intersection of business, national governance, and geopolitics that makes it incredibly hard to fairly assess all the constraints that go into any particular negotiation or decision.


I don’t mean the above comments on access and constraint as abstractions to obviate or sideline the kinds of models that economists or quantitative social scientists make, but I do intend them try to address the institutional or statutory decisions that create the mechanisms inbuilt into such models.  Crucially, whereas the models simply describe wealth divergence as an amplification of luck in the form of initial conditions, choosing the right abstraction of mechanism gets at how the amplifier works.

If there is an argument for a particular structure of taxation, which is a social institution, it could stem not even from an abstract moral or utilitarian domain (though I tend to agree with your positions on those as well), but from the practical domain that the whole rest of the structure of the market economy has inbuilt positive feedbacks which are inherently destabilizing, and that the stabilizing effects of progressive taxation are structural compensations — in the domain where they are possible — for the positive feedbacks elsewhere which are difficult to make less-positive because of the other ways the functions are designed.  

Like Steve and others, my thanks to the list,

Eric



> On Jan 21, 2017, at 2:56 AM, Robert Wall <wallrobert7 at gmail.com> wrote:
> 
> Good morning Marcus,
> 
> I didn't give you a fair reply to this particular post; I got distracted myself by the RT thing. 😊  I will try to make amends here ...
> 
> The Nautilus article--including my response to it--is about the "secret sauce" to massive wealth.  The author's surprising conclusion after doing multiple stochastic simulations is that it is predominantly luck that accounts for success even after treating the experiment for talent.  
> 
> "His research interests include the distribution of wealth, investments, CEO compensation, decision-making, and social phase transitions." 
> 
> So I guess Moshe Levy, the author, has been looking at this for a while. So, he wonders that if the secret sauce is just luck, then shouldn't we "tax" the lucky in a way to rebalance the game?  It is an interesting question for a hypothetical, non-intuitive result: the massively wealthy are massively lucky ... by virtue of the way they accrued their wealth.  [an aside: using the Buddhist concept of dependent arising, in this context, one can never say "I did this all by myself."] If you are a dyed in the wool capitalist you would likely recoil from such a suggestion; you would say that "these personal gains are due to an individual's hard work and talent ... we don't want to tax these virtues as it would provide a disincentive and bring the whole enterprise to a screeching halt."  
> 
> So the luck hypothesis seems to turn this argument on its head.  Moshe also squeezes in another "snarky" bit about the massively wealthy being able to avoid hard work and just live off of their investments. That just leaves talent or skill, which we are told he treats for in his experiment. 
> 
> Your idea, it seems, is that the answer to Moshe's wonder is that what anyone does about the wealth gap should depend on how one actually uses their wealth. Let's call this the use argument.  Do they, for example, use their wealth for improving society or for separating themselves from the same and living in their own gilded bubble?  [Please note that the thread's issue is with personal wealth and not corporate profits, leaving Google and payday loan institutions on the sidelines for the moment.] Risking to make your point a little better, in this case, I would have juxtaposed Bill Gates with the owners of WalMart, the family that owns as much wealth as the bottom 42% of all Americans combined. And, the latter entity will not even consider paying a living wage to its employees such that the American taxpayer do not have to pick up the tab for the rest.  Bill and Malinda Gates are well-regarded philanthropists. So okay; which one should be "taxed" more? 
> 
> I am not really in favor of using taxes as the sole way of righting the ship.  We have to also provide other ways for the 99% to earn their own way on their own steam, as it were.“Government is not the solution to our problem; government is the problem,” as Reagan is famous for saying.  But I would amend Reagan's First Innaguaral insight by saying that a large or growing governemnt is just a symptom of the problem. 
> 
> The problem with government is that there is too much demand for it.  If you ensure a living wage and provide for economic opportunities for all Americans there would be less demand for government.  Moreover, the American economy would have more viable consumers and less social dependency.  The New Deal was all about this kind of fix to an ailing economy, which was also due in some part to a grossly exaggerated wealth gap.  But this is something the capitalist failed to do themselves at that time. 
> 
> I would say neoliberalism is trying to engineer biased coins that land in a coordinated ways to build something more complex.   One way is with trade laws.
> 
> I think I can partly agree with this statement ... about the biased coin thing.  That is the rigging, IMHO; by not making adjustments to the flow of wealth [akin to blood flow in a body] the system gets sicker and sicker. Our economic system is arguably sick now when you consider the body composed of constituents comprising the consumers in the system [the cells, keeping with the metaphor].  To be sure, government does not have to be the institution making the adjustments; the captains if industry should do this first to avoid any necessary government intervention. 
> 
> Just like you say that there are differences in billionaires, there are differences in trade agreements. IMHO, the trade agreemets like NAFTA and TPP help to perpetuate the neoliberal status quo with the multi-national companies being the exclusive beneficiaries and the American worker [and society] being the ultimate loser.  We might look at this with a biological metaphor, say, the KT-extinction event, which percipitated a structural evolution allowing only the strong members to survive--strong for that niche, to be sure.  This would be in keeping with the former neoliberal trope: "We make money the old fashion way; we earn it."  [Remember that commercial in the early eighties with John Houseman ... who played Contract Law Professor Charles Kingsfield Jr. in the TV series The Paper Chase?  😎 ]
> 
> But, do we want to "live" in a world like that?  Or, can we evolve consciously as a society to find a more inclusive solution?  If it plays out as it has throughout history, the anser will be "not likely." I mean this hope could be bordering on complete naïveté, calling for a universal Kumbayah moment.  Yes? 😕  But let's go on ...
> 
> Neoliberalism is now well-established in American politics, especially with the SCOTUS' Citizens United decision. Just another symptom. The "blood" has mostly gone to the head.  It will take a revolution like the Arab Spring, IMHO. Not a Kumbayah moment!  As the Pareto distribution of wealth versus population continues to skew more, this will ultimately reach a tipping point ... and revolution will become more and more likely even in this country.  And, I didn't learn that at RT. 😁  [an aside: Capitalism requires some skew to the wealth versus population distribution in order for there to be incentive--the engine for such a market-based system ... and a very good system when resources are intelligently managed to not be wasteful--it's biggest arguable hit for the health of the planet. I get that, just like Kurt Vonnegut did in his Breakfast of Champions (1973). Capitalism is like gambling and investments.  There has to be sufficient likelihood of winning.]
> 
> As I watch the Inaguaration this morning and the mounting resistant to a Trump presidency, I see an irony unfolding that suggests that maybe half of America believe that the American economic situation could be different with a different election result. Neoliberalism--not the Russians--has effectively uncoupled those events.  The root of the problem is neoliberalism itself, IMHO. 
> 
> Yikes! I am kind of sounding like Reagan who ushhered in neoliberalism in the country thirty-five years ago. 🤔 🤐  Sorry.  Neoliberalism is a whole 'nother, different thread. 
> 
> I hope this is a better response Marcus ... 
> 
> Cheers,
> 
> Robert
> 
> 
> On Thu, Jan 19, 2017 at 8:39 PM, Marcus Daniels <marcus at snoutfarm.com> wrote:
> "The rigging is, IMHO, of not doing anything about the unabated and disproportionate flow of wealth to the top and, hence, giving rise to the resulting, ever-skewing, descriptive Pareto distribution of wealth versus population.  It certainly does seem like an increasing biasing of the metaphorical fair coin [e.g., the busted "trickle down" metaphor of President Ronald Reagan]."
> 
> 
> 
> I think it depends in part on the source of the wealth and how it is used.   There's a qualitative difference between a Google and a payday loan company that preys on the poor.   Are these wealthy people creating new high-paying jobs or locking-in people to dead-end jobs like coal mining?  Do they have a vision of advancement of humanity (Gates) or just a unnecessary assertion of the `need' for a lowest-common-denominator dog-eat-dog view of things?  How does their wealth and power matter in the long run?    It is at least good that there isn't just one kind of billionaire, like the sort that destroys the environment and enslaves people.  
> 
> 
> 
> A problem with government is that the agency it gives people is either very limited (you get food stamps so you can eat), or it is also hierarchical like these enterprises (you don't get much agency unless you fight your way up or are an elected official).  For people to truly be free means creating a commons that facilitates other kinds of motivators that are rewarding in more complex ways than just salary or status.   Universities don't really deliver on this, except perhaps for some professors who are in that world for most of their adult life. 
> 
> 
> 
> I would say neoliberalism is trying to engineer biased coins that land in a coordinated ways to build something more complex.   One way is with trade laws.  
> 
> 
> 
> Marcus
> 
> 
> 
> P.S. RT is the Russian Propaganda news outlet.   Of course, they'd have their own motives for wanting to diminish Chinese power.
> From: Friam <friam-bounces at redfish.com> on behalf of Robert Wall <wallrobert7 at gmail.com>
> Sent: Thursday, January 19, 2017 4:57:14 PM
> To: The Friday Morning Applied Complexity Coffee Group
> Subject: [FRIAM] Nautilus: Investing Is More Luck Than Talent
>  
> This is just an exploratory thought piece to try in this forum ... please skip if it seems, right off the bat, as being too thought-full ...   
> 
> Does Pareto's Principle (with the attending, so-called Power Law) provide good moral justification for an amped-up progressive tax strategy or a reverse-discriminating set of rebalancing policies [e.g., changing the probabilities for the "everyman"]?  And, is the argument one of morality or one of necessity?  That's what this thread and the subject Nautilus article intend to explore, especially with the events that will begin the next four years tomorrow.
> 
> Nautilus:  Investing Is More Luck Than Talent (January 19, 2017).
> The surprising message of the statistics of wealth distribution.
> 
> I returned and saw under the sun, that the race is not to the swift, nor the battle to the strong, 
> neither yet bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill, 
> but time and chance happeneth to them all.  (Ecclesiastes 9:11)
> 
> [an introductory aside: As computational statisticians, we love our simulations ... and our coin tosses.   We are always mindful of bias ... as, say, apparent with the ever-widening wealth gap. Money, Money, Money ...]  
> 
> 
> 
> So, as described in the subject Nautilus article, Pareto's Principle, descriptively seen so often in nature, seems to imply that the current widening wealth gap is, well, "natural?"  Judging by its prevalence in most all rich societies, it does seem so. However, remembering that this sorting process works even with fair coin tosses in investments and gambling, this process phenomenon with its biased outcomes seems to occur in many places and on many levels ...
> 
> For example, we find this aspect of luck in nature elsewhere in biological processes; from Wikipedia ... Chance and Necessity: Essay on the Natural Philosophy of Modern Biology is a 1970 book by Nobel Prize winner Jacques Monod, interpreting the processes of evolution to show that life is only the result of natural processes by "pure chance." The basic tenet of this book is that systems in nature with molecular biology, such as enzymatic biofeedback loops [metabolisms] can be explained without having to invoke final causality [e.g., Intelligent Design].  
> 
> Usually, relatively very few winners and many, many losers. Phenotypical luck or luck in tectonic location?
> 
> According to the introduction the book's title was inspired by a line attributed to Democritus, "Everything existing in the universe is the fruit of chance and necessity."
> 
> But, is there a necessity to Pareto's Principle? To answer this I must defer to my theoretical mathematician friends who so often look to Plato for such answers.   My thought is that the necessity comes from a need to, perhaps teleologically, react to it ... as the planet's only available potential intelligent designers ... the purpose being, on some scale, Darwinian-level survival. 
> 
> And, this aspect of fate by chance is also reasoned in the Pulitzer-winning Guns, Germs, and Steel: The Fates of Human Societies is a 1997, a transdisciplinary non-fiction book by Jared Diamond, professor of geography and physiology at the University of California, Los Angeles (UCLA).
> 
> The book attempts to explain why Eurasian civilizations (including North Africa) have survived and conquered others, while arguing against the idea that Eurasian hegemony is due to any form of Eurasian intellectual, moral, or inherent genetic superiority. Diamond argues that the gaps in power and technology between human societies originate primarily in environmental differences, which are amplified by various positive feedback loops. When cultural or genetic differences have favored Eurasians (for example, written language or the development among Eurasians of resistance to endemic diseases), he asserts that these advantages occurred because of the influence of geography on societies and cultures (for example, by facilitating commerce and trade between different cultures) and were not inherent in the Eurasian genomes. [Wikipedia]
> 
> The luck of geography.  So then, should the more fortunate nations be more progressively taxed?  Maybe we should ask Greece? Or see what Germany has to say?  Followers of egalitarianism would argue yes. Followers of Ayn Rand's capitalism or her Objectivism [like Speaker Paul Ryan] would argue no. I think most of the rest of us fall somewhere in between; that is, not sure. So, let's go on ...
> 
> Is the (economic) game rigged then, as Bernie Sanders and Elizabeth Warren have insisted? Personally, I would say absolutely yes, and neoliberalism is the underlying philosophy of the rigging process [hear just the 1st 12 minutes, if you watch].  But, maybe this political ideology is just one that is eventually spawned by a conspicuous need for moralistic or even Randian justification, by the winners, for its resulting destructiveness--as we so often hear, "wealth accumulation is based on hard work and talent."  So, intelligent design?  
> 
> The rigging is, IMHO, of not doing anything about the unabated and disproportionate flow of wealth to the top and, hence, giving rise to the resulting, ever-skewing, descriptive Pareto distribution of wealth versus population.  It certainly does seem like an increasing biasing of the metaphorical fair coin [e.g., the busted "trickle down" metaphor of President Ronald Reagan].
> 
> Going forward, maybe we need to think about this neoliberal meme as the next four years, with a President Donald Trump, begin tomorrow  ... while also remembering that morality is a human concept or "invention." Or is it?  Or, does that even matter?!  Perhaps, morality is just a necessity ... but what are its goals ... dare I say its "purpose?"  When did it emerge? With consciousness?  How did it emerge?  By chance, as Monad and Democritus would insist?  
> 
> Conjecture: It would seem that morality's human purpose is to check, slow, or rebalance the effects of the Pareto phenomenon in social and economic processes.  Wealth has always been disproportionately distributed. Surely, just like the "selfish gene," morality arose out of self-interest; so it arose with prerequisite consciousness and not necessarily just with human consciousness [e.g., we see evidence of "morality" in other primate social systems]. As a system model, neoliberalism is connected with a positive feedback loop to morality and with a negative feedback loop to social stability. I think that there is a tipping-point distribution of wealth versus population.
> 
> Conclusion: The above conjecture is borne up by chance and necessity.  The necessity is manifested by the need to rebalance the outcomes of the game [e.g., wealth or opportunity] every now and then, in order to ensure social stability. This just seems like a brain-dead conclusion that even Warren Buffet and Bill Gates get. But will Trump?  Strong critics of Hillary Clinton imply that she, like her husband, would surely have strengthened the negative feedback effect of neoliberalism toward their own self-interest and toward worsening social stability, IMHO.  The results of the November election are a kind of testament to this conclusion. In an unexpected way, we may have a chance with Trump to bring even more necessary awareness to the aforementioned system model that has often played out in human history and as recounted in Jared Diamond's book-length essays.  Bernie-style revolution? Perhaps. 
> 
> So, that is the idea of how chance and necessity fits here in "the game.". Now, let's dig into this idea of morality a bit more and how it fits in with the need for a different kind of evolution, not biological, but conscious evolution: 
> 
> This comment from a Quora article on this subject titled Is morality merely a social construct or something more? is notable:
> Mindaugas Kuprionis, works at CERN
> Written 17 Sep 2010
> 
> Just recently Edge.orgheld a conference titled "The New Science of Morality". Consensus statement signed by several scholars (list below) was such:
> 
> 1) Morality is a natural phenomenon and a cultural phenomenon
> 2) Many of the psychological building blocks of morality are innate 
> 3) Moral judgments are often made intuitively, with little deliberation or conscious weighing of evidence and alternatives
> 4) Conscious moral reasoning plays multiple roles in our moral lives 
> 5) Moral judgments and values are often at odds with actual behavior
> 6) Many areas of the brain are recruited for moral cognition, yet there is no "moral center" in the brain 
> 7) Morality varies across individuals and cultures 
> 8) Moral systems support human flourishing, to varying degrees  [aside-- so morality may be akin to metabolic systems at the level of society --regulating feedback loops of sorts]
> [aside--  Fyodor Dostoyevsky's Crime and Punishment comes to mind.  Under this eight-point new science, how would we judge the "higher-purpose" actions of Rodion Raskolnikov?]
> 
> So if it is true that there is no distributional purpose to luck other than a mechanistic, long-run, teleonomic sorting mechanism of outcomes in accordance with a Power Law, then should there be a necessary, periodic re-sorting of the initial conditions now skewed by chance ...  like with a deck of cards before the next deal ...?    All poker players would insist on no less.  Don't we all insist on a fair game?  It's an interesting question, IMHO.
> Yes, I know; lots to unpack here.  Sorry.  Nonetheless, I thought the Nautilus article was quite thought-provoking as they always seem to be. 
> Cheers,
> 
> -Robert
> 
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