20 ms·

Are super-rich people just better at making money?

344 points by dncosta 4y ago

mettamage 4y ago
I love explorables! Simple model but good to see. I am not sure I believe the reasoning in the title but the effect they show is interesting. Money is power, even in a heads or tails game
anovikov 4y ago
What's wrong about it? Unless you also "defund the police", that is. If law enforcement is well-funded and works well - which isn't all that expensive or hard on a national scale - than what's the problem about extreme inequality?
- wizofaus 4y ago
  If we were a species that evolved where extreme inequality made sense, we'd probably be fine with it. But we aren't - not even close. We have strong notions of fairness and acting in the best interests of society as a whole, that enable us to cooperate effectively etc. Extreme inequality eats away at what has made us successful as a species.
- mschuster91 4y ago
  > If law enforcement is well-funded and works well - which isn't all that expensive or hard on a national scale - than what's the problem about extreme inequality? Law enforcement in the US is insanely well funded. The NYPD, for example, has 5 billion dollars of budget for 50k employees and serves about 8.8 million citizens. In contrast, in the German state of Bavaria, a budget of 3.8 billion euros [1] supports 45.000 employees and 13 million people. And yet, Bavaria has extremely low crime rates (the lowest in Germany with ~3700/100k people [2]), and the police stats could be even better if cops weren't forced to waste time on marijuana bullshit... while in New York, headlines referring to a lack of safety are more or less the norm [3]. The most interesting thing to me is: in absolute numbers, Bavaria had 508.000 crime reports filed in 2021 (cleaned up for cases of being in Germany unlawfully). New York reports 95.000 crimes in 2021... a sixth of the Bavarian absolute case count. What is the cause of this difference, and why is public perception of safety so immensely different? [1] https://www.stmfh.bayern.de/haushalt/staatshaushalt_2019/haushaltsplan/epl03.pdf https://www.stmfh.bayern.de/haushalt/staatshaushalt_2019/hau... (page 5, table E, line "Polizei") [2] https://www.tvmainfranken.de/auch-dank-wuerzburg-und-aschaffenburg-niedrigste-kriminalbelastung-in-bayern-seit-ueber-vier-jahrzehnten-282102/ https://www.tvmainfranken.de/auch-dank-wuerzburg-und-aschaff... [3] https://www.bloomberg.com/graphics/2022-is-nyc-safe-crime-stat-reality/ https://www.bloomberg.com/graphics/2022-is-nyc-safe-crime-st... [4] https://www.newsweek.com/new-york-city-most-dangerous-year-crime-1990-compared-2022-1750454 https://www.newsweek.com/new-york-city-most-dangerous-year-c...
  - anovikov 4y ago
    Something is wrong here, 500M for 45K people means ~850 euros per month per employee which is less than German minimum wage (1584 eur per month). Plain mistake. $100K per year per employee in NYC sounds about right: around half are probably salaries plus payroll tax on them, resulting in just-over-poverty wage for low level employees and barely-middle-class for the higher ups; and the other half for supplies, building maintenance, etc.
    - mschuster91 4y ago
      > Something is wrong here, 500M for 45K people means ~850 euros per month per employee which is less than German minimum wage (1584 eur per month). Plain mistake. Indeed. I don't know what our precious Interior Minister has been talking about, chances are he simply once again blasted bullshit towards the press and no one called him out as well... I dug a bit in the government's budget plan and updated the figures. Still, we spend ~1.2 billion (assuming 1:1 exchange rate) less than the US, with five million more citizens that are served by the cops - so there is still a marked difference.
  - SyzygistSix 4y ago
    The difference is probably less poor and desperately poor people.
kderbyma 4y ago
I came to this conclusion long ago. I called it the gravitational model of the economy. money has gravity....the more it has, the stronger the pull. it wants to join....
orionblastar 4y ago
Better at finding opportunities to make money. Better at eliminating competition see Bill Gates and Microsoft and the DOJ. Some are just born rich and learned how to invest.
- bmitc 4y ago
  I don't think they're better at anything. The power of money to make money and to buy opportunity, time, and mitigate risk is extreme. Being able to take risks and fall back on your family's wealth can enable huge gains when taking high risk chances. See basically every "entrepreneur" like Gates, Bezos, Musk, Zuckerberg, etc.
- erie 4y ago
  Rich people are in the right sectors empowered by globalisation and tech, those are health care, food and education industries. https://www.youtube.com/watch?v=vsmwnUPQ3Q8 https://www.youtube.com/watch?v=vsmwnUPQ3Q8 Bill Gates is working on his version of circular economy, his charities feed into his investments: "The global pharmaceuticals market size is projected to grow from $1585.05 billion in 2022 to $2401.22 billion by 2029, at a CAGR of 6.1% in forecast period."
  - durnygbur 4y ago
    > circular economy haha that's my first thought when I hear about "charities" by the billionaires in the Anglosphere world... sounds like some tax dodging loophole with huge marketing budget and a website. Why don't they just pay their taxes?
bmitc 4y ago
To solve all this, it's pretty simple, and the U.S. actually used to do it: heavily tax the super rich. Heavy taxation and then appropriate use of those funds for education, R&D funding, infrastructure, etc. is actual trickle-down economics. And mega corporations should be heavily taxed instead of holding the country economically hostage. They jumpstart their companies off of government funding and R&D and then act abused when asked to help give back. Right now, the middle class is getting slammed with taxes. They make almost all their money through salary and get taxed heavily, while the super rich pay either no tax or a maximum of capital gains, so almost 40% or less than upper middle class in terms of percentage. Corporations and the super rich have bought out democracy, and what is crazy is that they are supported by the very groups they intrinsically hate and hurt through their policies.
- WalterBright 4y ago
  The top 1% pay 40% of the federal tax revenue. The top 5% pay 60%. California has the highest income tax at 13.3%, the highest federal tax rate is 37%. That makes the top income tax rate 50%.
  - underdeserver 4y ago
    Top 1% of salary earners. The CEOs, highly paid doctors, engineers. The real capitalists - those who hold the assets and pay for their yachts with stock-backed loans - they don't pay 40% of the federal tax revenue. Their salary is $1/year.
    - WalterBright 4y ago
      Loans are not income.
      - janalsncm 4y ago
        There is no law of nature that says only income can be taxed. Loans could be taxed.
bloodyplonker22 4y ago
The example that is used in this blog post is completely and absolutely wrong. He portrays wealth accumulation as a zero-sum game with people coin-flipping against each other. In reality, someone does not have to lose for wealth to be created.
- HPsquared 4y ago
  Indeed- the more money a person has, the more adventurous they can get in producing value. It's not rocket science! (most of the time)
  - quickthrower2 4y ago
    Producing value? Sometimes. Sometimes extracting rent. Sometimes speculating. If private equity buys a pharma company and cuts research, jacks up prices to extract money from insurance, that might be "clever" but it is not really benefitting anyone, quite the opposite. Obviously a lot of capital is used to create more value, but it does so by using labour, so it is the creativity of the people working for that capital that is adding the value mostly, while the capital sits back and enjoys it's growth. This is the concept behind public traded companies.
    - SyzygistSix 4y ago
      >while the capital sits back and enjoys it's growth So people should risk their capital for nothing? I'm all for better pay and working conditions but the value from some ventures does not always come from the creativity of the workers. Sometimes it does, sometimes it doesn't so much.
      - quickthrower2 4y ago
        Er no. Just saying we shouldn’t be in awe of people because they have money and can make more of it, like this is a societal service they are performing. Sometimes it is, sometimes it isn’t, sometimes it is the opposite.
  - 4y ago
HPsquared 4y ago
This yard-sale model isn't really how the economy works though, people don't continuously bet 20% of their net worth. It's something similar going on though, I think a lot of these variables would seem to be explained by considering the lognormal distribution for personal wealth. In a normal distribution, the shape of the distribution comes from a "random walk" left and right from a large number of steps of varying size. In a lognormal distribution, on the other hand, the random steps are not additive but multiplicative: e.g you multiply the previous figure by a (Gaussian) random variable many times. This seems to reflect economic reality that people make decisions proportional to the scale of their current wealth. If I make 10k, it would take 2k extra to entice me to a different job. If I make (or lose) 10% on an investment, etc. It's all multiplicative. The lognormal distribution also has a fatter "right tail" than a Gaussian, which is what we see IRL.
- naasking 4y ago
  I'm not sure it's intended to reflect the real economy. It's a useful model that shows how success and wealth inequality can arise for reasons of pure luck, and can have nothing to do with meritocracy. I'm not sure any of the points you raise really change the fundamental dynamics of what's shown here.
dhruval 4y ago
This smells misleading / overly simplistic but I can’t quite quite put my finger on precisely why? Some thoughts - consensual trades are win win (you want a sandwich, I want $5 let’s trade! And we both win) - something about the model is overly simplistic, like it produces a statistical distribution that looks like extreme inequality from randomness, but lots of different sorts of distributions can emerge from aggregating random (for eg a normal distribution several dice and looking at their totals).
- strstr 4y ago
  Zero-sum assumption and lack of returns on bets seem suspicious. Betting is a bad deal for everyone in this model (even the rich person) since each coin flip is variance for no expected gain. Kelly betting implies you should bet nothing in this game.
  - lozenge 4y ago
    If you increase the payoff of the bet, it might prevent the poorest from becoming destitute, but the relative effect (where wealth concentrates in a few people) intuitively would still be present.
    - flawn 4y ago
      That's what I meant. It just comes down to the inequality being there and rich people having more capital to bet/invest/whatever and relatively get richer just though them having a bigger starting capital.
- oreally 4y ago
  The thesis was an investigation into whether the super-rich are better at making money, but they just took widely known distributions to tell a story enforcing that view without diving in as to why that's the case. It's the classic case of using statistics as a method to divert blame onto something else. You learn nothing but a sense of despair from these kinds of analysis.
- gjulianm 4y ago
crimsoneer 4y ago
Pudding.cool is amazing. Go back them on Patreon (I think you get stickers)
samoit 4y ago
Probably, they have just more richer parents. And luck is also a factor
ZeroGravitas 4y ago
This combines with the observation that intelligence is normally distributed, so the rich people are more likely to be average people that got lucky, because there's more of them than smart people with a good strategy. It also applies in the opposite direction, there's more unlucky average people than true failures.
- johnfn 4y ago
  That doesn't seem to follow, unless intelligence and ability to make money are mostly uncorrelated, which I think is a very strong claim that needs to be substantiated.
  - ZeroGravitas 4y ago
    > Although such an unequal distribution may seem unfair, it might be justifiable if it turned out that the most successful people were indeed the most talented/competent. So what did the simulation find? On the one hand, talent wasn't irrelevant to success. In general, those with greater talent had a higher probability of increasing their success by exploiting the possibilities offered by luck. Also, the most successful agents were mostly at least average in talent. So talent mattered. > However, talent was definitely not sufficient because the most talented individuals were rarely the most successful. In general, mediocre-but-lucky people were much more successful than more-talented-but-unlucky individuals. The most successful agents tended to be those who were only slightly above average in talent but with a lot of luck in their lives. https://blogs.scientificamerican.com/beautiful-minds/the-role-of-luck-in-life-success-is-far-greater-than-we-realized/ https://blogs.scientificamerican.com/beautiful-minds/the-rol...
  - c22 4y ago
    From my observations these traits may be inversely correlated.
oli5679 4y ago
The model is zero-sum, there are no gains from trade, the people just speculate. In this context, trading is harmful and this type of activity should be banned, or at least heavily taxed. If economic activity is valuable, but leads to inequality, then you need some framework to trade off the value created vs. the social benefits of greater equality.
- wizofaus 4y ago
  I did think that but even if you extended the model to be one where money could be created via "successful" investments, I suspect much the same result would transpire - wealth would concentrate fairly rapidly if everyone kept re-investing %x of their wealth, such that a certain % of investments would result in wealth creation and others simple loss of funds.
  - oli5679 4y ago
    Yes, this is a great extension idea. If you make a model like this, for different parameters of speculation vs. value creation you can then test what the most socially beneficial rates of tax are. More tax will lead to smaller but more equal economies and laissez-faire shouldn’t be optimal. I would just want the model to acknowledge the non-speculation part, because many of the things I buy are from spectacularly rich companies, but that are genuinely useful to me.
Febra33 4y ago
Of course! But MY favourite billionaire is definitely not like the other billionaires..
Gatsky 4y ago
Well… except that many super rich had failed businesses, went bankrupt etc? I used to kinda think along the lines of this post. However, when examining the performance of top investors for example (eg Buffet, Templeton, Marks etc) it is clear it isn’t mainly luck.
- WalterBright 4y ago
  People can and do learn from running failed businesses.
theginger 4y ago
The coin flip game on this as an illustration of the gamblers ruin concept. It is the real reason casinos make so much money. People think they are taking off the small margin in the form of the house edge, but that is there really just to speed the process up a little bit, and to stop someone coming along with way more money than the casino and beating them at their own game. They are able to make huge profits by regularly taking all someone's money, or atleast all of what they are willing to risk.
fdhfdjkfhdkj 4y ago
[dead]
ytNumbers 4y ago
The article mentions that instituting a 0.5% tax made the coin flipping exercise much fairer. Since the income tax rates in the USA are way higher than that, it seems like I might be able to conclude that the USA treats people fairly. Articles like this one are hinting that people only improve their lot in life through luck. While luck does play a part in life, focusing on that seems counterproductive to me.
jmeister 4y ago
This focus on super-rich individuals is totally misguided. What's important is the economic system. Rich individuals are simply a nauseating side-effect of capitalism. Nobody really likes it, but there simply isn't anything better. The burden of proof is on the complainers. Even Marxist-sympathetic Peter Singer gets it. >Look, I think it would be better if you had an economic system in which we didn’t have billionaires—but the productivity that billionaires have generated was still there, and that money was more equitably distributed. But, really, there hasn’t been a system that has had equity in its distribution and the productivity that capitalism has had. I don’t see that happening anytime soon. http://archive.today/2021.04.25-160837/https://www.newyorker.com/culture/the-new-yorker-interview/peter-singer-is-committed-to-controversial-ideas http://archive.today/2021.04.25-160837/https://www.newyorker...
- danny_codes 4y ago
  I mean, we could just tax people more and redistribute to the bottom. Basically create a society with some high income spread, say 100x. So a low salary would be like 40k as a floor, and 4milliom as a ceiling. Wealth can be capped via a similar scheme. That way, people are highly incentived via capitolism just as they are now, but wealth is constrained. Imo it's not that the mechanics are wrong, it's that the parameters are ill-tuned
  - jmeister 4y ago
    This is fair. Piketty thinks even 10x spread is sufficient to incentivize the entrepreneurs. I’m suggesting that villainizing the rich is silly. Even in a perfectly meritocratic system according to OP, there’s going to be massive inequality.
deleted 4y ago
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DougBTX 4y ago
Ha, well that didn't go as expected! https://imgur.com/a/uyXjs1N https://imgur.com/a/uyXjs1N I do appreciate an interactive example that doesn't have a canned result :-)
abigail95 4y ago
There are so many wealth making opportunities that give more than literally zero expected value, and don't require 20% of your wealth. You can become rich by following the rules of expected value and compound interest. Backtest this against the population and tell me that people today wouldn't be richer if they made sound financial decisions based on the information at the time. I know I would be richer. The kicker is, wealth inequality would rise along with median wealth, because compound interest. This is so unpalatable for some people that they argue against sound decision making and reduce wealth creation to coin flips.
- maigret 4y ago
  While I’m not sure I’m following you 100%, luck takes a bigger part the higher the wealth. For example, existing billionaires have a way higher chance of having inherited a huge sum than the average population. If you take sound financial decisions you might get up to a million or a few, and above that it will be always more luck than skills. 100000x that is a huge lot of luck.
sberens 4y ago
"To make 100 dollars into 110 dollars, this is work. To make 100 million into 110 million, this is inevitable."
gabesullice 4y ago
This is a dishonest piece. It ignores that it's based on a zero-sum game and the world isn't zero sum. The quoted economists know that very well. I like that the coin flip game illustrates the concept of compounding interest, but it doesn't model wealth creation at all. Most new ventures aren't I-win-you-lose, they're we-win-or-I-lose. Wealthy people really can take bigger bets more frequently like the article suggests, but it's not necessarily at the expense of everyone else. A more accurate illustration would be a game where each round you have a choice: bet 25% of your money or recieve $0.30. After each round, you must pay $0.25 to play again. Some people start the game with no money, some people start with $1.00. If you think this game through, you'll still end up with super wealthy outliers and bankruptcies, but the players in the game actually have some agency.
- gyulai 4y ago
  That sounds interesting. Did you run the simulation?
  - gabesullice 4y ago
    I didn't. The interesting and difficult part would be that every agent could play a different strategy. It's fine to take $0.30 every round, you can play forever. Some people with a $1.00 would bet three times in a row, lose, and go bust. Edit: if you run it, I'd love to see and play with it!
- flawn 4y ago
  The only reason why it isn't zero sum is because we get access to more resources, and this leads de facto to more money in the pool (money <--> resources) right? If we assume the best case that these new resources are distributed equally and not depending on wealth, then the Yard Model still holds in place as we talk about relative percentages.
  - gabesullice 4y ago
    No, because new resources don't materialize like manna from heaven. Someone, somewhere needs to reorganize resources in a more efficient way or discover new ones. If you benefit "equally" from that change in dynamics to the person who actually catalyzed the change, then there would be less incentive to catalyze it in the first place. It may happen from time to time because people are curious and benevolent. But, in general, if catalyzing that change has a cost, then the society depends on some people sacrificing their own good for everyone else's. In other words, the benefactor will have paid to catalyze it, but they'll only get an "equal" share of the gains to the people who sacrificed nothing. I think you probably don't mean "equally" though. You probably mean "fairly". And it's probably true that "sacrificing" 20% of a billion dollars is a lot different than 20% of ten thousand dollars. But rates of return do tend to decrease at scale, maybe not enough? Personally, I think taking from the catalyzers isn't optimal. It's also petty to worry that they benefitted "too much" from their actions. If we must tax, tax land and consumption. I haven't thought it through, but maybe a 100% estate tax, minus some reasonably capped life insurance for spouses and dependents, would reduce some of the feelings of unfairness that people experience.
Gareth321 4y ago
I am a devout capitalist with an accounting degree and an MBA. I believe the theory and data indicates that wealth is a mix of (in order): luck, family wealth, social ability, attractiveness, height, intelligence, natural abilities which align well with making money (conscientiousness, ability to delay gratification, affinity for work in scalable professions like IT, etc), culture, place of residence, likelihood of sociopathy, and many more. Luck is part of it, but there are so many other factors here. When they converge, we often end up with people extremely good at making money. Under capitalism and in principle, this isn't a bad thing. It means they're generating outsized benefit for society. However problems quickly emerge: with economic power comes market inefficiencies. The wealthy can use their power to buy out competition, under-price them (below profit), out-market them, and leverage their efficiencies of scale and bargaining power to maintain a permanent moat. We are seeing all of this occur to an extreme degree in the modern software space. Frustratingly, anti-competitive laws have been on the books for a century, and are sufficiently broad to use. It's just that U.S. politicians lack the will. Existentially, I believe that power corrupts. Billionaires are billionaires because they created a lot of value for society. Great. But once they're billionaires, they can control the destiny of countries, and this undermines democracy and greater social outcomes. I believe therefore that a balance must exist between deterrent effect which occurs with aggressive redistribution (and the effect is undeniable), and preventing the emergence of ultra powerful individuals.
- _def 4y ago
  > I believe the theory and data indicates that wealth is a mix of (in order): luck, family wealth, social ability, attractiveness, height, intelligence, natural abilities which align well with making money (conscientiousness, ability to delay gratification, affinity for work in scalable professions like IT, etc), culture, place of residence, likelihood of sociopathy, and many more. One could argue that most (if not all) of these factors still come down to being lucky
  - chii 4y ago
    it's too reductionist to attribute luck to all of those factors imho.
beautifulfreak 4y ago
Isn't this just the old concept of the "Gambler's Ruin"? https://en.wikipedia.org/wiki/Gambler%27s_ruin https://en.wikipedia.org/wiki/Gambler%27s_ruin
mschuster91 4y ago
This article has some fascinating visualisations and offers a very compelling theory. However, I think the author lacks two very important points that compound the issue of poverty: the "boots theory" - aka a poor person spends 10$ a year over ten years on new but crap shoes while a rich person spends 100$ once every ten years for a new but good shoe - and the fact that money makes money. The latter is the elephant in the room, IMO: once you hit 1 million dollars net worth, even a very conservative investment aka government bonds at 1% yields 10.000$ a year, at 5 million dollars it's 50.000$ a year, and at 10 million dollars, it's 100.000$ a year. Basically, once you have reached ~5 million dollars of wealth, you can afford to do whatever the fuck you want (and a bit earlier, if you are willing to risk a bit more and go for stocks). You can choose to not work a day in your life any more and chill out in Costa Rica sipping pina coladas every day, you can go and work for some charity without payment, or you can start up a company and not care how much money you make - as long as you're not actually losing money or spending over the yield of your investments, you literally cannot fail any more. You and your children won't ever experience being poor or homeless. Super-rich people have it even easier. When you have 100 million dollars or manage to reach billionaire status - why not throw a million or two into some startups each year? Best case, you end up striking a goldmine and making ten times that, worst case you're out of a million dollars but your other conservative investments will make that back in a year.
- pixelfarmer 4y ago
  It is also fact that the more money you have, the more options to increase your wealth are actually offered to you. Means there is no "equal footing" to begin with. And when it comes to covering your basic human needs there is an upper limit to that, even if you go the luxury route.
hardware2win 4y ago
Haha this example is so obvious what happens in one MMORPG game I used to play There is hazard game dice where you have 50% chance to win But people who run those "casinos" figured many years ago that they will use e.g 90 95% payouts So this way the longer you plsy, the more you lose cuz even if you bet the same amount twice and win once and losr once then youre behind
s3000 4y ago
If resources would be distributed evenly, would society be better? Who would make better allocation decisions than some arbitrary elite that happens to be rich? Without those riches, where is the surplus money that can be invested into innovations? Right now, the masses could pool some small amounts of money like $10 and have millions and billions to start new companies. There was 'Ask HN: How might HN build a social network together?'[1]. I am not aware that something has been started, despite all the skills most likely being available. Without somebody fronting the money to make even more money, how can people be motivated to create progress? [1] https://news.ycombinator.com/item?id=33999296 https://news.ycombinator.com/item?id=33999296
kevin_nisbet 4y ago
Regardless of the rest, I like how this article shows the relationship of it's not the same bet to get back to where you started. I've observed very similar mistakes a number of times in how that % relationship works. It really reminds me of Eve Online. It's been a many years, but once upon a time when I did play it, we were looking at different sensor jammers. And the ones that looked like the worst were actually the best, because they couldn't be countered. Most worked like a +1/-1, but one applied as a fraction. So if the jammer cut a value by 50%, the counter to it added 50%. But adding 50% doesn't get you back to where you started, the opposite increase is 100%. 20 - 50% = 10. 10 + 50% = 15, not 20. Another one is for the property I live in, we're pushing back on the government about losing a subsidy of ~33%. The property management company, managers, accountants kept sending letters saying this will cause prices to go up 33%. And I keep having to explain that the notices are wrong, removal of a 33% subsidy increases prices by 50%, not 33%.
- specialist 4y ago
  wrt Eve Online, I've long thought that game economies could support public discourse. Just like how SimCity informs debates about land use. Of course "real world" games, which don't nerf winner-takes-all, wouldn't be much fun to play for the non-winners.
donatj 4y ago
The whole yard sale model suffers from the fallacy that there is a predefined amount of wealth. If that were true, we’d have exactly as much wealth as our cavemen brethren did, which is clearly not the case. Every time anyone creates something more valuable than the sum of its parts, value is added to the system. A bow is far more valuable than the wood used to build it. A hammer and nails far more valuable than the raw iron in stone. > What can the yard sale model tell us? Literally nothing. It fails to model any part of the actual system. It’s not just lacking complexity, it’s a facetious model lacking in any real aspects of anything involved. There is no choice, no intelligence, no reason. Just random chance. 92% of the US including 86% of people without homes in this country have Internet access. We can all make incredibly informed decisions these days. Better informed decisions than ever possible by all the wealthiest royalty in human history, in literally seconds. The author could have easily Googled the price for the exorbitant watch before they bought it. That’s entirely on them.
- A_Venom_Roll 4y ago
  > Every time anyone creates something more valuable than the sum of its parts, value is added to the system. I really like this angle, although the value of 'something' can vary for different people.
- popcorncowboy 4y ago
  Nonsense. It doesn't have to be a perfect model to still be a useful one. It's precisely because it's so unintuitive that it's interesting. Your introduction of a positive sum mechanic doesn't invalidate the model. Introducing a $new_value component still begs questions around who gets access to that value - and if the yard sale model holds, even perfectly equal distribution of that $new_value suffers from exponential outcome drift for anything except ridiculously high ratios of $new:$old - and in the real world, value is disproportionately captured by the already wealthy [0]. But hey, internet for you lazy proles, pull yourselves up by your shoelaces etc. [0] - https://wir2022.wid.world https://wir2022.wid.world -- The richest 1% captured 38% of all new wealth since '95, the bottom 50% captured 2%.
  - chii 4y ago
litver 4y ago
binomial distribution re-branded as "Yard-sale model"
eyphka 4y ago
It’s hilarious that the author blames the yard sale model for their never earning money on vintage watches. The issue with applying the yard sale model is when testing against real world markets, almost no market follows the predicted distribution curve, which imo implies that something about the model is incorrect, ergo cant possibly be the reason for continually losing deal on vinyage watches. Many markets follow pro basketball player distribution, and unless you believe that steph curry is getting lucky on every shot, implies different model.
5350-uiop-1130 4y ago
Unless you come from a wealthy situation, the only way to get rich is luck. That's it. Hard work is worthless, just ask people in the third-world work 18 hours for a pittance to survive. Of course luck may require certain knowledge, wherewithal and timing. You don't win a lotto without waking up at the right time, driving to the right shop and buying the right ticket.
- koonsolo 4y ago
  You're claiming all the super rich lay in their sofa's all day and waited until they got lucky? I'm laying in my sofa all day waiting to get lucky. Still, after all this time, still no luck. Maybe next year. Without super hard work, you won't get rich.
  - deleted 4y ago
    [deleted]
- kderbyma 4y ago
  Yup. the rich were lucky when they were born. they have a surplus of luck...they can. afford to be unlucky for years and years.....it's the same as the money thing....they can afford to lose
damethos 4y ago
Ι would like to recommend this book which explains how rich people hide their money and owning assets without getting taxed (since a lot of people mentioned this in the comments): https://www.goodreads.com/book/show/39979237-moneyland https://www.goodreads.com/book/show/39979237-moneyland
Cenk 4y ago
An archived PDF version of the paper mentioned can be found here: https://web.archive.org/web/20100527181035/http://www.cmth.bnl.gov/~anirban/papers/ac3.pdf https://web.archive.org/web/20100527181035/http://www.cmth.b...
theshrike79 4y ago
Money follows money. If I have 10€ and I make 1% profit, I've made a whopping 1€. Now I can buy a few potatoes. Someone with 1M€ makes the same amount of profit, now they have 10 000€. That's a good few months of living expenses for the regular person. And this is not even taking into account the access to different people and resources you get just with having enough money to get into the right circles.
- chii 4y ago
  comparing percentage profit is meaningless. At low monetary amounts (like 10 euros), it's easy to make 1% profit. At high monetary amounts like 1 million, it's quite hard to get 1% profit - much harder than at 10 euros. Therefore, to quantify the risks, the absolute amount invested must be compared, not just the return %. At $1 million, they took 100,000 times more risk than the $10 investment.
ARK_12 4y ago
Does this article also happen to be Robinhood's investment pitch and business model?
ramesh31 4y ago
Yes, because R > G. That's really all there is to it.
notwokeno 4y ago
The trick IMO is to use your extended family as a network and try to keep things within the network. People don't like this but not only does it work well it's often more efficient in general.
MisterBastahrd 4y ago
No. Money is better at making money. The system is designed to do this. If you're making money with your labor, you are at a gigantic disadvantage compared to those who are making their money by investing capital.
blakeburch 4y ago
Cool interactions on mobile. But the poor vs rich game ended up with the poor person going up to $1000 and the rich person going down below $100. I recognize it's just chance... but it's funny that the results directly conflicted the author's point.
- MetaMalone 4y ago
  Same thing happened to me. Lol
aizyuval 4y ago
Unfortunately, it’s a simulation. Coin flip is pure luck, so there’s no accountability in losing the game. Hence, redistributing the wealth sounds like a fair idea. The catch is that some people actually believe in luck, so they believe accountability doesn’t count. Plus, taxing the rich will (and rightfully so) make them leave. And then, who will pay the taxes? Who will create jobs? How many people will lose their jobs?
burlesona 4y ago
There are two core insights here that are actually pretty obvious: 1. 20% of 1200 is more than 20% of 800. Duh! But the practical insight is simply that people with more wealth can afford bigger bets and expect bigger payouts. 2. Many systems are sensitive to initial conditions. In this model, the first coin flip matter vastly more than all others and determines almost the entire outcome. As others have pointed out this is really not a good description of the economy as a whole due to its zero-sum assumption. However I think it’s a relatively useful analogy for the stock market and how other passive investment markets work. Passive investment is a larger percentage of the economy than ever before and is increasingly how the “rich get richer.” A very simple distribution solution therefore is to stop privileging capital gains and tax all income equally. But of course this has been considered and hasn’t gained traction. Another solution is to disrupt passive investment markets. The one that comes to mind is rental housing. If we made it much much easier to build housing then then rental housing market would be like the used car market: viable but not an easy place to sit back and make passive income.
- snapplebobapple 4y ago
  Something to keep in mind is that Capital gains are not as privileged as they appear in most places because people making that claim are usually not comparing earning a dollar as a person vs earning a dollar in a corp and flowing it through to the individual, they are comparing earning a dollar as a person to earning a dividend or selling a business. There is still a net positive if you hold in the corp for a long time and avoid the personal dividend tax for years and there are some capital gains exemptions for selling corps but they are smaller than most claims on the subject espouse. If you want to harmonize you have to be cognizant of this and not switch to overtaxing earning through corps
- xg15 4y ago
  > A very simple distribution solution therefore is to stop privileging capital gains and tax all income equally. But of course this has been considered and hasn’t gained traction. A reason why it hasn't gained traction though is that wealth doesn't just give you buying power but also political influence. So especially those who already have excessive wealth would be in a position to block such a measure.
dukeofdoom 4y ago
They're better at getting government to give them large sums of money too.
29athrowaway 4y ago
Just read this http://www.paulgraham.com/wealth.html http://www.paulgraham.com/wealth.html
CynicusRex 4y ago
I don't understand why Jon doesn't lose the $240. Because isn't that what he risked to get his opponent's ("me") $160? Conversely, "me" should've ended up with $1040 and Jon with $960.
0xmarcin 4y ago
So can this be generalized to other collectable items? If as a hobby I collect, sell and exchange X does it mean I will lose money in the long run? Recently there was a few articles about investing in Lego sets, from this article POV it may not be that good investment, the future price is hard to estimate and probably you will guess price increase/decrease about half of the time right. So using this model you will lose money in the long run. Or did I miss something? Returning to the simulation, the coin experiment can be explained using different model: Imagine position X on a line: |A A A A X B B B B B B B B B B B|, X can move either left or right by the amount specified by the rules of the game. But since one person is poorer the boundary | is closer to X. X is doing a random walk, so it will move with exactly the same probability e.g. 5 positions left or 5 positions right. But for the poor player 5 positions to the left means he is left with no money to play again, and for the rich player it means he lost some of his advantage. If the difference is huge like x100 the poor player has basically no change at winning at all. So this game is only fair if A and B have similar amount of money.
- int_19h 4y ago
  If you can only guess correctly half the time, then yes, it would apply to your scenario. But I don't think that's often the case with people who are seriously into collecting something. Chances are good that you know enough about what you're collecting to reasonably anticipate the things that will likely have more staying power.
quaxar 4y ago
The thought process of blaming all social problems on random outcomes, and marginalize the individual's volition, itself is a fallacy.
raincom 4y ago
What is the optimal size of a bet? This is called "Kelly bet". Even before Black-Scholes came into existence, Edward O. Thorp, a billionaire mathematician, figured out the innards of Black-Scholes strategy and made money for himself using Kelly strategy. If you invest in some stock, and if that stock is moving in your favor, you should increase your bet or leverage more. If your bet is moving against you, cut down your bet size. That's what experienced traders do--just reduce your position by 50 percent; inexperienced/retail traders tend to increase their position, when things go against them.
gxt 4y ago
No. It's momentum and inertia.
_siis 4y ago
No, rich people think about money, debt, and cash flow very differently. There are also a lot of bad actors at the upper end that are facilitating a global ponzi scheme at our expense, and they will be bailed out over and over again because they've made it impossible for competing banks to enter the market through lobbied regulation that came as a response to their bad behavior. Read up about the creation of the fed, what they've done, how many bailouts they've done, how many people were held accountable, you'll find it always ends in their favor. Behaviors that would send individuals to jail for decades are avoided by paying a small piece of the proceeds they get from those frauds disguised as penalties. Its been baked into the system. Worse, many people immediately jump to something along the lines of "well that's people being greedy and its a downside of capitalism and we have to do something about that". The problem with those people is, they don't know what they are talking about because its not capitalism, you often get monopolies in socialism, and while capitalistic societies are driven by a division of labor, socialistic economic systems are driven by corruption, and what are our the major issues right now? Corruption.
adamerose 4y ago
Their coin flip thought experiment is extremely misleading and it took me a while to understand why but now I think I can explain it. Intuitively, it seems like everyone is making a fair bet because you're equally likely to win or lose. If you have an initial net worth of $1000 and flip a coin you're equally like to gain or lose $200 and your expected net worth after the flip is still $1000 (50% chance of $1200 or $800) so it's a wash, right? However their simulation kept having me end up poor which confused me, so I ran the same simulation in a Python script. What I found was as the number of flips increases your net worth approaches zero! I found this surprising because if the expected net worth after a single flip is unchanged, I would expect this to stay true for multiple flips. But based on simulations, against my intuition, it seems like this is actually a bad bet in the long term and you'll always lose money. This is still true even if you start to skew the odds and give them a 51% chance to win the coin flip. So after some googling I found something called the Kelly Criterion which calculates whether a bet is good or bad based on the gains and losses and chance of each and decided to plug in these numbers: https://en.wikipedia.org/wiki/Kelly_criterion#Proof https://en.wikipedia.org/wiki/Kelly_criterion#Proof For the game in the article, the rules are that the poorer person bets 20% of their net worth on a coin flip, so these are the variables: f=20% p=50% q=50% a=20% b=20% r = (1 + f*b) ^ p * (1 – f*a) ^ q = (1 + 0.2 * 0.2) ^ 0.5 * (1 – 0.2 * 0.2) ^ 0.5 = 0.99919967974 So the long term geometric return of playing this game is 0.999, and since it's slightly below 1 you will lose money in the long term. And the really misleading part is it seems like everyone is playing the same game, but what's really happening is the POORER person is playing this game (because the net worth value comes from them) and the rich person is just taking the inverse bet against them. In other words, this thought experiment is "force a poor person to play this gambling game with a geometric return below 1 (so on average they lose money), and pair them up with a rich person who gains money equal to the poor person's losses", which is obviously going to result in rich people being favored and gaining money. If you forced a rich person to play this same game of repeatedly betting 20% of their money on a coin flip they would also end up losing all their money! When you frame it like this it's obvious that having a poor person play an unfavored gambling game and deposit their losses to a rich person is going to favor the rich people. This doesn't seem like a critique on capitalism or inequality, it's more analogous gambling at a casino. ---- However I am still confused how you can have a game where the expected gain after a single match is 0%, but when playing multiple rounds your expected gain is negative (this is what plugging numbers into the expected value formula in the Kelly Criterion wiki seems to prove). I find this counterintuitive and hoping someone can explain this.

344 points by dncosta 4y ago

I love explorables! Simple model but good to see. I am not sure I believe the reasoning in the title but the effect they show is interesting. Money is power, even in a heads or tails game

anovikov 4y ago

What's wrong about it? Unless you also "defund the police", that is. If law enforcement is well-funded and works well - which isn't all that expensive or hard on a national scale - than what's the problem about extreme inequality?

wizofaus 4y ago
If we were a species that evolved where extreme inequality made sense, we'd probably be fine with it. But we aren't - not even close. We have strong notions of fairness and acting in the best interests of society as a whole, that enable us to cooperate effectively etc. Extreme inequality eats away at what has made us successful as a species.
mschuster91 4y ago
> If law enforcement is well-funded and works well - which isn't all that expensive or hard on a national scale - than what's the problem about extreme inequality? Law enforcement in the US is insanely well funded. The NYPD, for example, has 5 billion dollars of budget for 50k employees and serves about 8.8 million citizens. In contrast, in the German state of Bavaria, a budget of 3.8 billion euros [1] supports 45.000 employees and 13 million people. And yet, Bavaria has extremely low crime rates (the lowest in Germany with ~3700/100k people [2]), and the police stats could be even better if cops weren't forced to waste time on marijuana bullshit... while in New York, headlines referring to a lack of safety are more or less the norm [3]. The most interesting thing to me is: in absolute numbers, Bavaria had 508.000 crime reports filed in 2021 (cleaned up for cases of being in Germany unlawfully). New York reports 95.000 crimes in 2021... a sixth of the Bavarian absolute case count. What is the cause of this difference, and why is public perception of safety so immensely different? [1] https://www.stmfh.bayern.de/haushalt/staatshaushalt_2019/haushaltsplan/epl03.pdf https://www.stmfh.bayern.de/haushalt/staatshaushalt_2019/hau... (page 5, table E, line "Polizei") [2] https://www.tvmainfranken.de/auch-dank-wuerzburg-und-aschaffenburg-niedrigste-kriminalbelastung-in-bayern-seit-ueber-vier-jahrzehnten-282102/ https://www.tvmainfranken.de/auch-dank-wuerzburg-und-aschaff... [3] https://www.bloomberg.com/graphics/2022-is-nyc-safe-crime-stat-reality/ https://www.bloomberg.com/graphics/2022-is-nyc-safe-crime-st... [4] https://www.newsweek.com/new-york-city-most-dangerous-year-crime-1990-compared-2022-1750454 https://www.newsweek.com/new-york-city-most-dangerous-year-c...
- anovikov 4y ago
  Something is wrong here, 500M for 45K people means ~850 euros per month per employee which is less than German minimum wage (1584 eur per month). Plain mistake. $100K per year per employee in NYC sounds about right: around half are probably salaries plus payroll tax on them, resulting in just-over-poverty wage for low level employees and barely-middle-class for the higher ups; and the other half for supplies, building maintenance, etc.
  - mschuster91 4y ago
    > Something is wrong here, 500M for 45K people means ~850 euros per month per employee which is less than German minimum wage (1584 eur per month). Plain mistake. Indeed. I don't know what our precious Interior Minister has been talking about, chances are he simply once again blasted bullshit towards the press and no one called him out as well... I dug a bit in the government's budget plan and updated the figures. Still, we spend ~1.2 billion (assuming 1:1 exchange rate) less than the US, with five million more citizens that are served by the cops - so there is still a marked difference.
- SyzygistSix 4y ago
  The difference is probably less poor and desperately poor people.

kderbyma 4y ago

I came to this conclusion long ago. I called it the gravitational model of the economy. money has gravity....the more it has, the stronger the pull. it wants to join....

orionblastar 4y ago

Better at finding opportunities to make money. Better at eliminating competition see Bill Gates and Microsoft and the DOJ. Some are just born rich and learned how to invest.

bmitc 4y ago
I don't think they're better at anything. The power of money to make money and to buy opportunity, time, and mitigate risk is extreme. Being able to take risks and fall back on your family's wealth can enable huge gains when taking high risk chances. See basically every "entrepreneur" like Gates, Bezos, Musk, Zuckerberg, etc.
erie 4y ago
Rich people are in the right sectors empowered by globalisation and tech, those are health care, food and education industries. https://www.youtube.com/watch?v=vsmwnUPQ3Q8 https://www.youtube.com/watch?v=vsmwnUPQ3Q8 Bill Gates is working on his version of circular economy, his charities feed into his investments: "The global pharmaceuticals market size is projected to grow from $1585.05 billion in 2022 to $2401.22 billion by 2029, at a CAGR of 6.1% in forecast period."
- durnygbur 4y ago
  > circular economy haha that's my first thought when I hear about "charities" by the billionaires in the Anglosphere world... sounds like some tax dodging loophole with huge marketing budget and a website. Why don't they just pay their taxes?

bmitc 4y ago

To solve all this, it's pretty simple, and the U.S. actually used to do it: heavily tax the super rich. Heavy taxation and then appropriate use of those funds for education, R&D funding, infrastructure, etc. is actual trickle-down economics. And mega corporations should be heavily taxed instead of holding the country economically hostage. They jumpstart their companies off of government funding and R&D and then act abused when asked to help give back. Right now, the middle class is getting slammed with taxes. They make almost all their money through salary and get taxed heavily, while the super rich pay either no tax or a maximum of capital gains, so almost 40% or less than upper middle class in terms of percentage. Corporations and the super rich have bought out democracy, and what is crazy is that they are supported by the very groups they intrinsically hate and hurt through their policies.

WalterBright 4y ago
The top 1% pay 40% of the federal tax revenue. The top 5% pay 60%. California has the highest income tax at 13.3%, the highest federal tax rate is 37%. That makes the top income tax rate 50%.
- underdeserver 4y ago
  Top 1% of salary earners. The CEOs, highly paid doctors, engineers. The real capitalists - those who hold the assets and pay for their yachts with stock-backed loans - they don't pay 40% of the federal tax revenue. Their salary is $1/year.
  - WalterBright 4y ago
    Loans are not income.
    - janalsncm 4y ago
      There is no law of nature that says only income can be taxed. Loans could be taxed.

bloodyplonker22 4y ago

The example that is used in this blog post is completely and absolutely wrong. He portrays wealth accumulation as a zero-sum game with people coin-flipping against each other. In reality, someone does not have to lose for wealth to be created.

HPsquared 4y ago
Indeed- the more money a person has, the more adventurous they can get in producing value. It's not rocket science! (most of the time)
- quickthrower2 4y ago
  Producing value? Sometimes. Sometimes extracting rent. Sometimes speculating. If private equity buys a pharma company and cuts research, jacks up prices to extract money from insurance, that might be "clever" but it is not really benefitting anyone, quite the opposite. Obviously a lot of capital is used to create more value, but it does so by using labour, so it is the creativity of the people working for that capital that is adding the value mostly, while the capital sits back and enjoys it's growth. This is the concept behind public traded companies.
  - SyzygistSix 4y ago
    >while the capital sits back and enjoys it's growth So people should risk their capital for nothing? I'm all for better pay and working conditions but the value from some ventures does not always come from the creativity of the workers. Sometimes it does, sometimes it doesn't so much.
    - quickthrower2 4y ago
      Er no. Just saying we shouldn’t be in awe of people because they have money and can make more of it, like this is a societal service they are performing. Sometimes it is, sometimes it isn’t, sometimes it is the opposite.
- 4y ago

HPsquared 4y ago

This yard-sale model isn't really how the economy works though, people don't continuously bet 20% of their net worth. It's something similar going on though, I think a lot of these variables would seem to be explained by considering the lognormal distribution for personal wealth. In a normal distribution, the shape of the distribution comes from a "random walk" left and right from a large number of steps of varying size. In a lognormal distribution, on the other hand, the random steps are not additive but multiplicative: e.g you multiply the previous figure by a (Gaussian) random variable many times. This seems to reflect economic reality that people make decisions proportional to the scale of their current wealth. If I make 10k, it would take 2k extra to entice me to a different job. If I make (or lose) 10% on an investment, etc. It's all multiplicative. The lognormal distribution also has a fatter "right tail" than a Gaussian, which is what we see IRL.

naasking 4y ago
I'm not sure it's intended to reflect the real economy. It's a useful model that shows how success and wealth inequality can arise for reasons of pure luck, and can have nothing to do with meritocracy. I'm not sure any of the points you raise really change the fundamental dynamics of what's shown here.

dhruval 4y ago

This smells misleading / overly simplistic but I can’t quite quite put my finger on precisely why? Some thoughts - consensual trades are win win (you want a sandwich, I want $5 let’s trade! And we both win) - something about the model is overly simplistic, like it produces a statistical distribution that looks like extreme inequality from randomness, but lots of different sorts of distributions can emerge from aggregating random (for eg a normal distribution several dice and looking at their totals).

strstr 4y ago
Zero-sum assumption and lack of returns on bets seem suspicious. Betting is a bad deal for everyone in this model (even the rich person) since each coin flip is variance for no expected gain. Kelly betting implies you should bet nothing in this game.
- lozenge 4y ago
  If you increase the payoff of the bet, it might prevent the poorest from becoming destitute, but the relative effect (where wealth concentrates in a few people) intuitively would still be present.
  - flawn 4y ago
    That's what I meant. It just comes down to the inequality being there and rich people having more capital to bet/invest/whatever and relatively get richer just though them having a bigger starting capital.
oreally 4y ago
The thesis was an investigation into whether the super-rich are better at making money, but they just took widely known distributions to tell a story enforcing that view without diving in as to why that's the case. It's the classic case of using statistics as a method to divert blame onto something else. You learn nothing but a sense of despair from these kinds of analysis.
gjulianm 4y ago

crimsoneer 4y ago

Pudding.cool is amazing. Go back them on Patreon (I think you get stickers)

samoit 4y ago

Probably, they have just more richer parents. And luck is also a factor

ZeroGravitas 4y ago

This combines with the observation that intelligence is normally distributed, so the rich people are more likely to be average people that got lucky, because there's more of them than smart people with a good strategy. It also applies in the opposite direction, there's more unlucky average people than true failures.

johnfn 4y ago
That doesn't seem to follow, unless intelligence and ability to make money are mostly uncorrelated, which I think is a very strong claim that needs to be substantiated.
- ZeroGravitas 4y ago
  > Although such an unequal distribution may seem unfair, it might be justifiable if it turned out that the most successful people were indeed the most talented/competent. So what did the simulation find? On the one hand, talent wasn't irrelevant to success. In general, those with greater talent had a higher probability of increasing their success by exploiting the possibilities offered by luck. Also, the most successful agents were mostly at least average in talent. So talent mattered. > However, talent was definitely not sufficient because the most talented individuals were rarely the most successful. In general, mediocre-but-lucky people were much more successful than more-talented-but-unlucky individuals. The most successful agents tended to be those who were only slightly above average in talent but with a lot of luck in their lives. https://blogs.scientificamerican.com/beautiful-minds/the-role-of-luck-in-life-success-is-far-greater-than-we-realized/ https://blogs.scientificamerican.com/beautiful-minds/the-rol...
- c22 4y ago
  From my observations these traits may be inversely correlated.

oli5679 4y ago

The model is zero-sum, there are no gains from trade, the people just speculate. In this context, trading is harmful and this type of activity should be banned, or at least heavily taxed. If economic activity is valuable, but leads to inequality, then you need some framework to trade off the value created vs. the social benefits of greater equality.

wizofaus 4y ago
I did think that but even if you extended the model to be one where money could be created via "successful" investments, I suspect much the same result would transpire - wealth would concentrate fairly rapidly if everyone kept re-investing %x of their wealth, such that a certain % of investments would result in wealth creation and others simple loss of funds.
- oli5679 4y ago
  Yes, this is a great extension idea. If you make a model like this, for different parameters of speculation vs. value creation you can then test what the most socially beneficial rates of tax are. More tax will lead to smaller but more equal economies and laissez-faire shouldn’t be optimal. I would just want the model to acknowledge the non-speculation part, because many of the things I buy are from spectacularly rich companies, but that are genuinely useful to me.

Febra33 4y ago

Of course! But MY favourite billionaire is definitely not like the other billionaires..

Gatsky 4y ago

Well… except that many super rich had failed businesses, went bankrupt etc? I used to kinda think along the lines of this post. However, when examining the performance of top investors for example (eg Buffet, Templeton, Marks etc) it is clear it isn’t mainly luck.

WalterBright 4y ago
People can and do learn from running failed businesses.

theginger 4y ago

The coin flip game on this as an illustration of the gamblers ruin concept. It is the real reason casinos make so much money. People think they are taking off the small margin in the form of the house edge, but that is there really just to speed the process up a little bit, and to stop someone coming along with way more money than the casino and beating them at their own game. They are able to make huge profits by regularly taking all someone's money, or atleast all of what they are willing to risk.

fdhfdjkfhdkj 4y ago

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ytNumbers 4y ago

The article mentions that instituting a 0.5% tax made the coin flipping exercise much fairer. Since the income tax rates in the USA are way higher than that, it seems like I might be able to conclude that the USA treats people fairly. Articles like this one are hinting that people only improve their lot in life through luck. While luck does play a part in life, focusing on that seems counterproductive to me.

jmeister 4y ago

This focus on super-rich individuals is totally misguided. What's important is the economic system. Rich individuals are simply a nauseating side-effect of capitalism. Nobody really likes it, but there simply isn't anything better. The burden of proof is on the complainers. Even Marxist-sympathetic Peter Singer gets it. >Look, I think it would be better if you had an economic system in which we didn’t have billionaires—but the productivity that billionaires have generated was still there, and that money was more equitably distributed. But, really, there hasn’t been a system that has had equity in its distribution and the productivity that capitalism has had. I don’t see that happening anytime soon. http://archive.today/2021.04.25-160837/https://www.newyorker.com/culture/the-new-yorker-interview/peter-singer-is-committed-to-controversial-ideas http://archive.today/2021.04.25-160837/https://www.newyorker...

danny_codes 4y ago
I mean, we could just tax people more and redistribute to the bottom. Basically create a society with some high income spread, say 100x. So a low salary would be like 40k as a floor, and 4milliom as a ceiling. Wealth can be capped via a similar scheme. That way, people are highly incentived via capitolism just as they are now, but wealth is constrained. Imo it's not that the mechanics are wrong, it's that the parameters are ill-tuned
- jmeister 4y ago
  This is fair. Piketty thinks even 10x spread is sufficient to incentivize the entrepreneurs. I’m suggesting that villainizing the rich is silly. Even in a perfectly meritocratic system according to OP, there’s going to be massive inequality.

deleted 4y ago

[deleted]

DougBTX 4y ago

Ha, well that didn't go as expected! https://imgur.com/a/uyXjs1N https://imgur.com/a/uyXjs1N I do appreciate an interactive example that doesn't have a canned result :-)

abigail95 4y ago

There are so many wealth making opportunities that give more than literally zero expected value, and don't require 20% of your wealth. You can become rich by following the rules of expected value and compound interest. Backtest this against the population and tell me that people today wouldn't be richer if they made sound financial decisions based on the information at the time. I know I would be richer. The kicker is, wealth inequality would rise along with median wealth, because compound interest. This is so unpalatable for some people that they argue against sound decision making and reduce wealth creation to coin flips.

maigret 4y ago
While I’m not sure I’m following you 100%, luck takes a bigger part the higher the wealth. For example, existing billionaires have a way higher chance of having inherited a huge sum than the average population. If you take sound financial decisions you might get up to a million or a few, and above that it will be always more luck than skills. 100000x that is a huge lot of luck.

sberens 4y ago

"To make 100 dollars into 110 dollars, this is work. To make 100 million into 110 million, this is inevitable."

gabesullice 4y ago

This is a dishonest piece. It ignores that it's based on a zero-sum game and the world isn't zero sum. The quoted economists know that very well. I like that the coin flip game illustrates the concept of compounding interest, but it doesn't model wealth creation at all. Most new ventures aren't I-win-you-lose, they're we-win-or-I-lose. Wealthy people really can take bigger bets more frequently like the article suggests, but it's not necessarily at the expense of everyone else. A more accurate illustration would be a game where each round you have a choice: bet 25% of your money or recieve $0.30. After each round, you must pay $0.25 to play again. Some people start the game with no money, some people start with $1.00. If you think this game through, you'll still end up with super wealthy outliers and bankruptcies, but the players in the game actually have some agency.

gyulai 4y ago
That sounds interesting. Did you run the simulation?
- gabesullice 4y ago
  I didn't. The interesting and difficult part would be that every agent could play a different strategy. It's fine to take $0.30 every round, you can play forever. Some people with a $1.00 would bet three times in a row, lose, and go bust. Edit: if you run it, I'd love to see and play with it!
flawn 4y ago
The only reason why it isn't zero sum is because we get access to more resources, and this leads de facto to more money in the pool (money <--> resources) right? If we assume the best case that these new resources are distributed equally and not depending on wealth, then the Yard Model still holds in place as we talk about relative percentages.
- gabesullice 4y ago
  No, because new resources don't materialize like manna from heaven. Someone, somewhere needs to reorganize resources in a more efficient way or discover new ones. If you benefit "equally" from that change in dynamics to the person who actually catalyzed the change, then there would be less incentive to catalyze it in the first place. It may happen from time to time because people are curious and benevolent. But, in general, if catalyzing that change has a cost, then the society depends on some people sacrificing their own good for everyone else's. In other words, the benefactor will have paid to catalyze it, but they'll only get an "equal" share of the gains to the people who sacrificed nothing. I think you probably don't mean "equally" though. You probably mean "fairly". And it's probably true that "sacrificing" 20% of a billion dollars is a lot different than 20% of ten thousand dollars. But rates of return do tend to decrease at scale, maybe not enough? Personally, I think taking from the catalyzers isn't optimal. It's also petty to worry that they benefitted "too much" from their actions. If we must tax, tax land and consumption. I haven't thought it through, but maybe a 100% estate tax, minus some reasonably capped life insurance for spouses and dependents, would reduce some of the feelings of unfairness that people experience.

Gareth321 4y ago

I am a devout capitalist with an accounting degree and an MBA. I believe the theory and data indicates that wealth is a mix of (in order): luck, family wealth, social ability, attractiveness, height, intelligence, natural abilities which align well with making money (conscientiousness, ability to delay gratification, affinity for work in scalable professions like IT, etc), culture, place of residence, likelihood of sociopathy, and many more. Luck is part of it, but there are so many other factors here. When they converge, we often end up with people extremely good at making money. Under capitalism and in principle, this isn't a bad thing. It means they're generating outsized benefit for society. However problems quickly emerge: with economic power comes market inefficiencies. The wealthy can use their power to buy out competition, under-price them (below profit), out-market them, and leverage their efficiencies of scale and bargaining power to maintain a permanent moat. We are seeing all of this occur to an extreme degree in the modern software space. Frustratingly, anti-competitive laws have been on the books for a century, and are sufficiently broad to use. It's just that U.S. politicians lack the will. Existentially, I believe that power corrupts. Billionaires are billionaires because they created a lot of value for society. Great. But once they're billionaires, they can control the destiny of countries, and this undermines democracy and greater social outcomes. I believe therefore that a balance must exist between deterrent effect which occurs with aggressive redistribution (and the effect is undeniable), and preventing the emergence of ultra powerful individuals.

_def 4y ago
> I believe the theory and data indicates that wealth is a mix of (in order): luck, family wealth, social ability, attractiveness, height, intelligence, natural abilities which align well with making money (conscientiousness, ability to delay gratification, affinity for work in scalable professions like IT, etc), culture, place of residence, likelihood of sociopathy, and many more. One could argue that most (if not all) of these factors still come down to being lucky
- chii 4y ago
  it's too reductionist to attribute luck to all of those factors imho.

beautifulfreak 4y ago

Isn't this just the old concept of the "Gambler's Ruin"? https://en.wikipedia.org/wiki/Gambler%27s_ruin https://en.wikipedia.org/wiki/Gambler%27s_ruin

mschuster91 4y ago

This article has some fascinating visualisations and offers a very compelling theory. However, I think the author lacks two very important points that compound the issue of poverty: the "boots theory" - aka a poor person spends 10$ a year over ten years on new but crap shoes while a rich person spends 100$ once every ten years for a new but good shoe - and the fact that money makes money. The latter is the elephant in the room, IMO: once you hit 1 million dollars net worth, even a very conservative investment aka government bonds at 1% yields 10.000$ a year, at 5 million dollars it's 50.000$ a year, and at 10 million dollars, it's 100.000$ a year. Basically, once you have reached ~5 million dollars of wealth, you can afford to do whatever the fuck you want (and a bit earlier, if you are willing to risk a bit more and go for stocks). You can choose to not work a day in your life any more and chill out in Costa Rica sipping pina coladas every day, you can go and work for some charity without payment, or you can start up a company and not care how much money you make - as long as you're not actually losing money or spending over the yield of your investments, you literally cannot fail any more. You and your children won't ever experience being poor or homeless. Super-rich people have it even easier. When you have 100 million dollars or manage to reach billionaire status - why not throw a million or two into some startups each year? Best case, you end up striking a goldmine and making ten times that, worst case you're out of a million dollars but your other conservative investments will make that back in a year.

pixelfarmer 4y ago
It is also fact that the more money you have, the more options to increase your wealth are actually offered to you. Means there is no "equal footing" to begin with. And when it comes to covering your basic human needs there is an upper limit to that, even if you go the luxury route.

hardware2win 4y ago

Haha this example is so obvious what happens in one MMORPG game I used to play There is hazard game dice where you have 50% chance to win But people who run those "casinos" figured many years ago that they will use e.g 90 95% payouts So this way the longer you plsy, the more you lose cuz even if you bet the same amount twice and win once and losr once then youre behind

s3000 4y ago

If resources would be distributed evenly, would society be better? Who would make better allocation decisions than some arbitrary elite that happens to be rich? Without those riches, where is the surplus money that can be invested into innovations? Right now, the masses could pool some small amounts of money like $10 and have millions and billions to start new companies. There was 'Ask HN: How might HN build a social network together?'[1]. I am not aware that something has been started, despite all the skills most likely being available. Without somebody fronting the money to make even more money, how can people be motivated to create progress? [1] https://news.ycombinator.com/item?id=33999296 https://news.ycombinator.com/item?id=33999296

kevin_nisbet 4y ago

Regardless of the rest, I like how this article shows the relationship of it's not the same bet to get back to where you started. I've observed very similar mistakes a number of times in how that % relationship works. It really reminds me of Eve Online. It's been a many years, but once upon a time when I did play it, we were looking at different sensor jammers. And the ones that looked like the worst were actually the best, because they couldn't be countered. Most worked like a +1/-1, but one applied as a fraction. So if the jammer cut a value by 50%, the counter to it added 50%. But adding 50% doesn't get you back to where you started, the opposite increase is 100%. 20 - 50% = 10. 10 + 50% = 15, not 20. Another one is for the property I live in, we're pushing back on the government about losing a subsidy of ~33%. The property management company, managers, accountants kept sending letters saying this will cause prices to go up 33%. And I keep having to explain that the notices are wrong, removal of a 33% subsidy increases prices by 50%, not 33%.

specialist 4y ago
wrt Eve Online, I've long thought that game economies could support public discourse. Just like how SimCity informs debates about land use. Of course "real world" games, which don't nerf winner-takes-all, wouldn't be much fun to play for the non-winners.

donatj 4y ago

The whole yard sale model suffers from the fallacy that there is a predefined amount of wealth. If that were true, we’d have exactly as much wealth as our cavemen brethren did, which is clearly not the case. Every time anyone creates something more valuable than the sum of its parts, value is added to the system. A bow is far more valuable than the wood used to build it. A hammer and nails far more valuable than the raw iron in stone. > What can the yard sale model tell us? Literally nothing. It fails to model any part of the actual system. It’s not just lacking complexity, it’s a facetious model lacking in any real aspects of anything involved. There is no choice, no intelligence, no reason. Just random chance. 92% of the US including 86% of people without homes in this country have Internet access. We can all make incredibly informed decisions these days. Better informed decisions than ever possible by all the wealthiest royalty in human history, in literally seconds. The author could have easily Googled the price for the exorbitant watch before they bought it. That’s entirely on them.

A_Venom_Roll 4y ago
> Every time anyone creates something more valuable than the sum of its parts, value is added to the system. I really like this angle, although the value of 'something' can vary for different people.
popcorncowboy 4y ago
Nonsense. It doesn't have to be a perfect model to still be a useful one. It's precisely because it's so unintuitive that it's interesting. Your introduction of a positive sum mechanic doesn't invalidate the model. Introducing a $new_value component still begs questions around who gets access to that value - and if the yard sale model holds, even perfectly equal distribution of that $new_value suffers from exponential outcome drift for anything except ridiculously high ratios of $new:$old - and in the real world, value is disproportionately captured by the already wealthy [0]. But hey, internet for you lazy proles, pull yourselves up by your shoelaces etc. [0] - https://wir2022.wid.world https://wir2022.wid.world -- The richest 1% captured 38% of all new wealth since '95, the bottom 50% captured 2%.
- chii 4y ago

litver 4y ago

binomial distribution re-branded as "Yard-sale model"

eyphka 4y ago

It’s hilarious that the author blames the yard sale model for their never earning money on vintage watches. The issue with applying the yard sale model is when testing against real world markets, almost no market follows the predicted distribution curve, which imo implies that something about the model is incorrect, ergo cant possibly be the reason for continually losing deal on vinyage watches. Many markets follow pro basketball player distribution, and unless you believe that steph curry is getting lucky on every shot, implies different model.

5350-uiop-1130 4y ago

Unless you come from a wealthy situation, the only way to get rich is luck. That's it. Hard work is worthless, just ask people in the third-world work 18 hours for a pittance to survive. Of course luck may require certain knowledge, wherewithal and timing. You don't win a lotto without waking up at the right time, driving to the right shop and buying the right ticket.

koonsolo 4y ago
You're claiming all the super rich lay in their sofa's all day and waited until they got lucky? I'm laying in my sofa all day waiting to get lucky. Still, after all this time, still no luck. Maybe next year. Without super hard work, you won't get rich.
- deleted 4y ago
  [deleted]
kderbyma 4y ago
Yup. the rich were lucky when they were born. they have a surplus of luck...they can. afford to be unlucky for years and years.....it's the same as the money thing....they can afford to lose

damethos 4y ago

Ι would like to recommend this book which explains how rich people hide their money and owning assets without getting taxed (since a lot of people mentioned this in the comments): https://www.goodreads.com/book/show/39979237-moneyland https://www.goodreads.com/book/show/39979237-moneyland

Cenk 4y ago

An archived PDF version of the paper mentioned can be found here: https://web.archive.org/web/20100527181035/http://www.cmth.bnl.gov/~anirban/papers/ac3.pdf https://web.archive.org/web/20100527181035/http://www.cmth.b...

theshrike79 4y ago

Money follows money. If I have 10€ and I make 1% profit, I've made a whopping 1€. Now I can buy a few potatoes. Someone with 1M€ makes the same amount of profit, now they have 10 000€. That's a good few months of living expenses for the regular person. And this is not even taking into account the access to different people and resources you get just with having enough money to get into the right circles.

chii 4y ago
comparing percentage profit is meaningless. At low monetary amounts (like 10 euros), it's easy to make 1% profit. At high monetary amounts like 1 million, it's quite hard to get 1% profit - much harder than at 10 euros. Therefore, to quantify the risks, the absolute amount invested must be compared, not just the return %. At $1 million, they took 100,000 times more risk than the $10 investment.

ARK_12 4y ago

Does this article also happen to be Robinhood's investment pitch and business model?

ramesh31 4y ago

Yes, because R > G. That's really all there is to it.

notwokeno 4y ago

The trick IMO is to use your extended family as a network and try to keep things within the network. People don't like this but not only does it work well it's often more efficient in general.

MisterBastahrd 4y ago

No. Money is better at making money. The system is designed to do this. If you're making money with your labor, you are at a gigantic disadvantage compared to those who are making their money by investing capital.

blakeburch 4y ago

Cool interactions on mobile. But the poor vs rich game ended up with the poor person going up to $1000 and the rich person going down below $100. I recognize it's just chance... but it's funny that the results directly conflicted the author's point.

MetaMalone 4y ago
Same thing happened to me. Lol

aizyuval 4y ago

Unfortunately, it’s a simulation. Coin flip is pure luck, so there’s no accountability in losing the game. Hence, redistributing the wealth sounds like a fair idea. The catch is that some people actually believe in luck, so they believe accountability doesn’t count. Plus, taxing the rich will (and rightfully so) make them leave. And then, who will pay the taxes? Who will create jobs? How many people will lose their jobs?

burlesona 4y ago

There are two core insights here that are actually pretty obvious: 1. 20% of 1200 is more than 20% of 800. Duh! But the practical insight is simply that people with more wealth can afford bigger bets and expect bigger payouts. 2. Many systems are sensitive to initial conditions. In this model, the first coin flip matter vastly more than all others and determines almost the entire outcome. As others have pointed out this is really not a good description of the economy as a whole due to its zero-sum assumption. However I think it’s a relatively useful analogy for the stock market and how other passive investment markets work. Passive investment is a larger percentage of the economy than ever before and is increasingly how the “rich get richer.” A very simple distribution solution therefore is to stop privileging capital gains and tax all income equally. But of course this has been considered and hasn’t gained traction. Another solution is to disrupt passive investment markets. The one that comes to mind is rental housing. If we made it much much easier to build housing then then rental housing market would be like the used car market: viable but not an easy place to sit back and make passive income.

snapplebobapple 4y ago
Something to keep in mind is that Capital gains are not as privileged as they appear in most places because people making that claim are usually not comparing earning a dollar as a person vs earning a dollar in a corp and flowing it through to the individual, they are comparing earning a dollar as a person to earning a dividend or selling a business. There is still a net positive if you hold in the corp for a long time and avoid the personal dividend tax for years and there are some capital gains exemptions for selling corps but they are smaller than most claims on the subject espouse. If you want to harmonize you have to be cognizant of this and not switch to overtaxing earning through corps
xg15 4y ago
> A very simple distribution solution therefore is to stop privileging capital gains and tax all income equally. But of course this has been considered and hasn’t gained traction. A reason why it hasn't gained traction though is that wealth doesn't just give you buying power but also political influence. So especially those who already have excessive wealth would be in a position to block such a measure.

dukeofdoom 4y ago

They're better at getting government to give them large sums of money too.

29athrowaway 4y ago

Just read this http://www.paulgraham.com/wealth.html http://www.paulgraham.com/wealth.html

CynicusRex 4y ago

I don't understand why Jon doesn't lose the $240. Because isn't that what he risked to get his opponent's ("me") $160? Conversely, "me" should've ended up with $1040 and Jon with $960.

0xmarcin 4y ago

So can this be generalized to other collectable items? If as a hobby I collect, sell and exchange X does it mean I will lose money in the long run? Recently there was a few articles about investing in Lego sets, from this article POV it may not be that good investment, the future price is hard to estimate and probably you will guess price increase/decrease about half of the time right. So using this model you will lose money in the long run. Or did I miss something? Returning to the simulation, the coin experiment can be explained using different model: Imagine position X on a line: |A A A A X B B B B B B B B B B B|, X can move either left or right by the amount specified by the rules of the game. But since one person is poorer the boundary | is closer to X. X is doing a random walk, so it will move with exactly the same probability e.g. 5 positions left or 5 positions right. But for the poor player 5 positions to the left means he is left with no money to play again, and for the rich player it means he lost some of his advantage. If the difference is huge like x100 the poor player has basically no change at winning at all. So this game is only fair if A and B have similar amount of money.

int_19h 4y ago
If you can only guess correctly half the time, then yes, it would apply to your scenario. But I don't think that's often the case with people who are seriously into collecting something. Chances are good that you know enough about what you're collecting to reasonably anticipate the things that will likely have more staying power.

quaxar 4y ago

The thought process of blaming all social problems on random outcomes, and marginalize the individual's volition, itself is a fallacy.

raincom 4y ago

What is the optimal size of a bet? This is called "Kelly bet". Even before Black-Scholes came into existence, Edward O. Thorp, a billionaire mathematician, figured out the innards of Black-Scholes strategy and made money for himself using Kelly strategy. If you invest in some stock, and if that stock is moving in your favor, you should increase your bet or leverage more. If your bet is moving against you, cut down your bet size. That's what experienced traders do--just reduce your position by 50 percent; inexperienced/retail traders tend to increase their position, when things go against them.

gxt 4y ago

No. It's momentum and inertia.

_siis 4y ago

No, rich people think about money, debt, and cash flow very differently. There are also a lot of bad actors at the upper end that are facilitating a global ponzi scheme at our expense, and they will be bailed out over and over again because they've made it impossible for competing banks to enter the market through lobbied regulation that came as a response to their bad behavior. Read up about the creation of the fed, what they've done, how many bailouts they've done, how many people were held accountable, you'll find it always ends in their favor. Behaviors that would send individuals to jail for decades are avoided by paying a small piece of the proceeds they get from those frauds disguised as penalties. Its been baked into the system. Worse, many people immediately jump to something along the lines of "well that's people being greedy and its a downside of capitalism and we have to do something about that". The problem with those people is, they don't know what they are talking about because its not capitalism, you often get monopolies in socialism, and while capitalistic societies are driven by a division of labor, socialistic economic systems are driven by corruption, and what are our the major issues right now? Corruption.

adamerose 4y ago

Their coin flip thought experiment is extremely misleading and it took me a while to understand why but now I think I can explain it. Intuitively, it seems like everyone is making a fair bet because you're equally likely to win or lose. If you have an initial net worth of $1000 and flip a coin you're equally like to gain or lose $200 and your expected net worth after the flip is still $1000 (50% chance of $1200 or $800) so it's a wash, right? However their simulation kept having me end up poor which confused me, so I ran the same simulation in a Python script. What I found was as the number of flips increases your net worth approaches zero! I found this surprising because if the expected net worth after a single flip is unchanged, I would expect this to stay true for multiple flips. But based on simulations, against my intuition, it seems like this is actually a bad bet in the long term and you'll always lose money. This is still true even if you start to skew the odds and give them a 51% chance to win the coin flip. So after some googling I found something called the Kelly Criterion which calculates whether a bet is good or bad based on the gains and losses and chance of each and decided to plug in these numbers: https://en.wikipedia.org/wiki/Kelly_criterion#Proof https://en.wikipedia.org/wiki/Kelly_criterion#Proof For the game in the article, the rules are that the poorer person bets 20% of their net worth on a coin flip, so these are the variables: f=20% p=50% q=50% a=20% b=20% r = (1 + f*b) ^ p * (1 – f*a) ^ q = (1 + 0.2 * 0.2) ^ 0.5 * (1 – 0.2 * 0.2) ^ 0.5 = 0.99919967974 So the long term geometric return of playing this game is 0.999, and since it's slightly below 1 you will lose money in the long term. And the really misleading part is it seems like everyone is playing the same game, but what's really happening is the POORER person is playing this game (because the net worth value comes from them) and the rich person is just taking the inverse bet against them. In other words, this thought experiment is "force a poor person to play this gambling game with a geometric return below 1 (so on average they lose money), and pair them up with a rich person who gains money equal to the poor person's losses", which is obviously going to result in rich people being favored and gaining money. If you forced a rich person to play this same game of repeatedly betting 20% of their money on a coin flip they would also end up losing all their money! When you frame it like this it's obvious that having a poor person play an unfavored gambling game and deposit their losses to a rich person is going to favor the rich people. This doesn't seem like a critique on capitalism or inequality, it's more analogous gambling at a casino. ---- However I am still confused how you can have a game where the expected gain after a single match is 0%, but when playing multiple rounds your expected gain is negative (this is what plugging numbers into the expected value formula in the Kelly Criterion wiki seems to prove). I find this counterintuitive and hoping someone can explain this.