(Roughly) Daily

“Oh, I am fortune’s fool!”*…

 

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?…

A new computer model of wealth creation confirms that the most successful people are not the most talented, just the luckiest. Learn more at: “If you’re so smart, why aren’t you rich? Turns out it’s just chance.

* Shakespeare, Romeo and Juliet

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As we muse on merit, we might send carefully-calculated birthday greetings to a forbearer of the researchers who did the work recounted above, Sir Roy George Douglas Allen; he was born on this date in 1906.  A mathematician and statistician turned economist, he was a leader in the field of mathematical economics, writing a number of influential texts including  Mathematical Analysis for EconomistsStatistics for Economists, and Mathematical Economics.

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Written by LW

June 3, 2018 at 1:01 am

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