Luck is a powerful factor in making people rich

Published in the San Diego Union-Tribune, September 26, 2016

“I won the ovarian lottery.” – Warren Buffet

What the Oracle of Omaha is saying is that he won the lottery when he was born white, healthy, smart and living in America.  Right before he exited the womb, there were 6.8 billion tickets, and he was lucky enough to pick that one.  And Buffet is very public about his blessing.   He says, “Gratitude is a key ingredient to personal happiness.”

But this column is not about inequality or privilege or education or race or gender – it is about luck.  What role does luck play in making you rich?

For this, we turn to Ben Steverman at Bloomberg Business Week.  He tells the story of Robert Frank who has a heart attack on the tennis court. He lives to tell the tale and play again because there was an accident three blocks away at that time, and two ambulances arrived, and only one was needed, so when the call came, the extra ambulance reached him in three minutes.  The rest is history.  No double fault.

Frank, who is a professor of economics at Cornell says, “I am alive today because of pure dumb luck.”  Not sure if it is coincidence or divine intervention, Frank has now begun to study the role of luck in the creation of wealth.   His new book is “Success and Luck: Good Fortune and the Myth of Meritocracy.”

Frank boldly reminds us of a bit of political heresy.  He points out that Elizabeth Warren and Barack Obama were “pilloried” for suggesting that “the wealthy among us didn’t do it all themselves.”  The Masters of the Universe howled.

Frank rightly points out the role of the individual, the Bill Gates, the Steve Jobs – they were talented and hardworking.  But they happened to arrive at the same time that a favorable macro environment arrived.

If you bought a house in 1990, you entered a favorable macro for 15 years.  Same as buying stocks in April 2009; the Dow has almost tripled since then.  Think about how you met your current wife (assuming you are happily married).  Twenty minutes on either side, and you probably miss each other.

Not only where you were born, but when you were born make a difference.  Kids born in the fall tend to be the oldest in their class.  That has a relevance that gives these children a lifelong advantage over their peers. Lucky sperm club.

And finally the dark sentence is this– the fierce economic competition in all areas today tends to favor the “winner take all” result.  The few top performers reap the bulk of the rewards.

Look at venture firms.  Ninety-five percent of the massive returns come to only a very few firms.  So the goal for every fund is to be in those deals – at any cost.   But there is only room for the most favorite – and success breeds success, so the little guy does not really have a chance.

And the Internet trumps  (sorry about that) geography.  You can dominate your industry from a cabin in Montana – if you have Wi-Fi.

Frank runs a simulation in which he inserts luck as a component of just two percent.  In other words, skill is 98% of the result.  But with 100,000 participants, “the most skilled person wins just six percent of the time.”

Let’s also look at my favorite Nobel prize winning economist, Dan Kahneman.  “The world is far more random than we are programmed to believe, he says.  It is always easy to make sense of one’s life in retrospect.”  Kahneman has done a study on Wall Street traders and found that their results were actually not much better than random selections.  It made them crazy, but “there is a great deal more luck than skill involved in the achievements of people getting very rich.”

Very is a key word. It is the outlier result that is disproportionate.  If you had a software company in 1999, you were very lucky.

Frank goes on to explore tax policy, suggesting that if we provided more opportunities for everyone to get lucky, we would create more wealth across all sectors.  “Would you rather drive a $120,000 Porsche on a well-maintained road or a $300,000 Ferrari over one with deep potholes.”  (I leave that puzzle for the next election.)

Rule No. 480:  Never discount the power of luck.

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