Are the 1% just lucky?

I expect some folks who oppose the Occupy movement will weigh in on merit – that the top 1% are deserving of their riches because they include people who pay a lot of wages and salaries for ordinary folk. That is, the story of hard-working, risk-taking entrepreneurs who should not be punished for being successful.

I don’t really have any opposition to people who work hard and become successful, as long as they pay their fair share of taxes as “dues” for living in a country that enables that success. But there is good reason to think that luck may matter more than hard work. There is a lot of inherited wealth out there, a form of genetic luck I’ve seen up close, that perpetuates inequality over the generations. But little things like flukes and chance encounters can also be huge.

A couple articles are worth a look in full, and I’ve just extracted some key messages below. Fortune magazine has some nice case studies mixed with evidence in this (slightly dated) article:

For those of us who believe we are the masters of our fate, the captains of our soul, the notion that a career might hinge on random events is unthinkable. Self-made men and women are especially touchy on this subject. If they get all the breaks, it’s because they’re smarter and harder working than everyone else. If they know the right people, it’s because they network the nights away. Luck? Many successful people think it diminishes them.

Hard workers do get ahead, no doubt about it. So do people with charisma, uncommon ability, and great legs. But then there are folks like Ringo Starr. One day he was an obscure drummer of limited talent from Liverpool; the next day he was a Beatle.

… Chance may favor the prepared mind, but to one degree or another, chance happeneth to us all. As Northwestern sociologist Christopher Jencks wrote in his seminal work Inequality, financial success often depends on “chance acquaintances who steer you to one line of work rather than another, the range of jobs that happen to be available in a particular community when you are job hunting, the amount of overtime work in your particular plant, whether bad weather destroys your strawberry crop, whether the new superhighway has an exit near your restaurant, and a hundred other unpredictable accidents.” In the broadest sense, then, luck is the great “but for” in life: But for this or that bit of luck–good or bad–you would have married a different person, had a different career, lived in a different city.

… USING census data and a 20-year longitudinal study of 5,000 families, Jencks and other social scientists controlled for all sorts of variables that might pave the way to wealth and power, including parental income, the neighborhood a person grows up in, education, occupation, and test scores. Concludes Jencks: “We can account for no more than 50% of a person’s success. The rest is a combination of our inability to measure things–and luck.”

Part of what Jencks can’t easily quantify is personality, and that, we know, can make or break a career. But isn’t it also a matter of luck whether or not your particular personality suits the task at hand? “An administrator is quite likely to earn more money if he or she is good at pouring oil on troubled waters,” says Jencks. Then also, someone who can downsize without a hint of remorse will be highly valued in a top-heavy organization.

… Luck falls on rich and poor alike, though not in equal measure: People born into poverty are less likely to succeed than those who aren’t. “There is stickiness at the bottom, just like there’s stickiness at the top,” says Mary Corcoran, a professor of public policy at the University of Michigan. Her data show that children raised in a family whose income is below the poverty line end up earning 30% to 40% less than those whose parents’ income is two to three times that at the poverty line. Breaking the cycle is tough, but not impossible: The poor have to either work a lot harder than most people do–or get a lot luckier.

More recently, economist Robert Frank writes:

Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events. … [A] disproportionate number of pro hockey players owe their success to the accident of having been born in January, which made them the oldest, most experienced players in every youth league growing up. For that reason alone, they were more likely to make all-star teams, receive special coaching and eventually become professionals.

Although people are often quick to ascribe their own success to skill and hard work, even those qualities entail heavy elements of luck. Debate continues about the degree to which personal traits are attributable to environmental and genetic factors. But whatever the true weights of each, these factors in combination explain nearly everything. People born with good genes and raised in nurturing families can claim little moral credit for their talent and industriousness. They were just lucky. And they are vastly more likely to succeed than people born without talent and raised in unsupportive environments.

Even in markets where luck plays no role, minuscule differences in performance often translate into enormous differences in salaries. … As economists have only begun to realize, pay differences often vastly overstate differences in performance — not only in traditional winner-take-all labor markets like entertainment and sports, but also in more conventional arenas. In law, consulting, investment banking, corporate management and a host of other occupations, the ablest performers are often paid hundreds or even thousands of times as much as others who perform nearly as well.

 

10 comments

  • The cultural inheritance is the greatest factor in anything produced today, not the lucky “inventor” who partly through extra effort, partly to luck and other social and genetic circumstances happens to invent something a few weeks or months before others would have invented it. http://www.garalperovitz.com/UnjustDeserts.html

  • Agreed. Very reminiscent of “Fooled by Randomness” by Nassim Taleb. We seem to be designed to be fooled into thinking ourselves wise when we are merely lucky. All of us except me, of course 🙂

  • Very nice. But why pick on Ringo?

  • @ Travis:

    We already have an inheritance tax (deemed disposition on death). Perhaps you’re thinking of boosting it, or adding another layer (as a recent AFB suggested)?

  • Yes, it is luck. They are lucky that they have the ear of policy makers to ensure that their income (not wages) is taxed to a far lesser degree. They are lucky that the same policy makers enact regulations that protect them global competition. They will remain lucky so long as they have the money to gain the attenion of those whom provide them with so much ‘luck’.

  • Has nothing to do with luck it’s just an artifact of large numbers and the lack of rules limiting how much property and wealth individuals can accumulate.

    If I make a widget in a society of 10,000 people it’s hard to get really wealthy without upsetting the community since the community is relatively small and they have sizable numbers. In the modern world with modern technology and weapons. Wealthy people can do all sorts of bullshit and move their money around at lightspeed throughout the world. Technology has enabled the hyper-concentration of wealth and hyper-exploitation.

    More and more work is done by machines, oil and energy and wealthy people own most of those wealth producing technologies.

    There is no free market there are just human institutions and their relationships. Institutions are transformed by technology in such a way that speaking about society as a market no longer makes any kind of sense. Most jobs today are make-work to keep the wage-caste model of society going because of the way human history turned out and the fact that there billions of human beings that want western lifestyles… and there aren’t enough resources to go around.

  • “There is no such thing as good luck or bad luck. There is only a varying ability to deal with a statistical universe.” – Robert Heinlein.

    I think there’s a lot of confirmation bias going on here. What if everyone is subject to ‘lucky’ events over the course of a lifetime, but some people are better prepared to take advantage of it?

    I know a person who is relatively poor who has had more ‘lucky breaks’ than I can count. He just never capitalized on them. He got a dream job, but failed at it. He was offered a position leading to a partnership in a successful company by a relative, but screwed it up when he walked off the job one day in a rage. Often, those lucky breaks come along and you don’t even recognize them.

    One of the best jobs I ever got was a total fluke: I was working in a computer store as a sales associate/tech guy, and a customer came in looking for a computer. I worked my tail off to do a good job for him, and as it turned out he needed a computer guy for his project and offered me the job. That job led to others, and I built a careeer. Was I lucky? It certainly was a chance encounter. But I put myself in a position to take advantage of it by working hard, impressing the client, and getting off my butt in the first place while the other computer tech on shift was too lazy to bother. No doubt he considers it bad luck that he didn’t get the job and I did.

    Take the message from ‘Outliers’ regarding professional hockey quoted above. Were the players born in January ‘lucky’? If you look at it one way, yes. But on the other hand, if the majority of pro hockey players were born in the first three months of the year, that makes more opportunities in other fields for people born in the other months. The key is to figure out what makes YOU special, not to complain about the breaks someone else may have gotten.

    And let’s not forget the main message from ‘Outliers’ – it doesn’t matter how much luck is involved – in the end, the truly successful ones tend to be the ones who do the work. Most of the great successes Gladwell mentions in his book had put in thousands of hours of practice or study before rising to the heights of success. They may have gotten lucky, but the only way they could take advantage of that luck was by working their butts off. It wasn’t like winning the lottery.

  • I agree with Dan.
    Communistic China has embrassed capitalism due to communism not working for their society.
    Here in Canada the top 1% pay about 30% of total income taxes which leaves the other 99% to pay the remaining 70% of taxes.
    If you succeed you pay.
    Thanks to globalization you 99% will not be able to carve out any more for your freebies.
    If you were really so concerned for your fellow man,
    why dont you wait for the third world to catch up to your standard before you talk about luck.
    I’m ok with you living your life in poverty if thats your choice.
    After the 1% have paid 30% of all income taxes I can sleep at night knowing that I’ve paid more than my share for thoes who are genuinely less fortunate.
    We live in a free country where anything is possible if you apply yourself.
    Maybe we should implement an IQ tax for thoes of you who do not apply your IQ towards creating wealth and jobs for all Canadians.

  • There are lazy rich as much as there are lazy poor. When I worked at the university, a lot of the students there were so ungrateful. They lived off their parents’ trust accounts, never needed to work, and went to the bars every weekend, and these unfortunately, are the people that get the advantages. I know many other students who relied entirely on OSAP, now completely stuck with student debt and not enough work to pay it off. People under a certain age as well, regardless of education, are going to have to do the impossible, if they lack parental support; that is, pay their own way through school, hold down two full time minimum wage jobs while they do it, and eventually become ill from overwork. I know about this. I’ve been there.

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