(public).sospep.subjects ~ view article ~ at-the-high-end-investment-success-is-luck

<h1 style="text-align: center;">Investing is more luck than talent</h1>
<h2>[WHAT]</h2>
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<li>] by BY MOSHE LEVY @ nautil.us -&nbsp;The surprising message of the statistics of wealth distribution.</li>
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<h2>[WHY]</h2>
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<li>]&nbsp;</li>
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<h2>[WHERE]</h2>
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<li><strong>] READ THE FULL ARTICLE</strong></li>
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<li>]&nbsp;<a href="http://nautil.us/issue/44/luck/investing-is-more-luck-than-talent" target="_blank">http://nautil.us/issue/44/luck/investing-is-more-luck-than-talent</a></li>
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<h2>[WHEN]</h2>
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<li>] 2017-01-24&nbsp;</li>
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<h2>[EXAMPLE - auto summary by smmry.com ]</h2>
<p>At the High End, Investment Success Is Luck</p>
<p>Depending on which economist you ask, big inequalities in wealth are either an essential engine for growth-the reward that motivates people to work hard, innovate, and prosper-or a ticking time bomb capable of unleashing mass misery, social upheaval, or even violent revolution.</p>
<p>In the U.S., for example, the top 1 percent of the population holds 42 percent of the national wealth.</p>
<p>Where do such massive differences in wealth come from? The positive narrative surrounding inequality might chalk them up to the talent and effort of high earners.</p>
<p>They cannot possibly be the whole story at the high end, where people's wealth is primarily determined by capital gains or losses on investments.</p>
<p>We all know stories of ambitious and talented people like Steve Jobs or Bill Gates, who grew companies and created great wealth.</p>
<p>The distribution of wealth at the highest end of the scale is quite consistent with pure luck.</p>
<p>That coin-flip analogy does suggest a better way to differentiate between talent and luck: Instead of looking at specific individuals, look at the way wealth is distributed over the whole population at the high end of the wealth spectrum.</p>
<p>I have applied this idea to the world of investments and the distribution of wealth by imagining the following investment game.1 A large number of investors all start with $100,000.</p>
<p>A few lucky investors who happen to toss 20 heads in a row will have wealth of $19 million.</p>
<p>To make the game more realistic, assume that if investors' wealth declines below some level they have to drop out of the game, and are replaced by newly rich players emerging from the middle class.</p>
<p>Eventually, the game will reach a kind of equilibrium-one in which the number of players going up is always balanced by the number going down, so that the overall distribution of wealth reaches a steady state and doesn't change anymore.</p>
<p>It's the kind of modeling result that makes professional economists take notice: A power law distribution of high-end wealth is exactly what they see in the real world, not only in the U.S., but in many other nations.</p>
<p>In the real world, in other words, the distribution of wealth at the highest end of the scale is quite consistent with pure luck.</p>
<p>Nor does it allow for the fact that some people are born with inherited wealth that gives them a huge head start in life.</p>
<p>Another possible objection is that it may take a very long time for the wealth distribution to converge to its steady state.</p>
<p>It has been shown both numerically and experimentally that the convergence to the Pareto wealth distribution is actually quite fast.2.</p>
<p>Now we set the players loose and ask an empirical question: How big can this "Talent differential" be and still stay statistically consistent with the power law wealth distribution we see in the real world?</p>
<p>2 A larger talent differential would produce a wealth distribution that is even more extreme than the real one, and that would not follow a power law.</p>
<p>If this is indeed the case-if the effects of talent are really so much smaller than the effects of luck at the high end of the wealth scale-then corporate boards might want to keep that fact in mind when setting the compensation plans for fund managers or CEOs: "Reward for performance" may actually be mostly a reward for luck.3, 4 Likewise when it comes to debates over raising taxes on the rich: The argument that this would be punishing talent might not hold.</p>
<p>His research interests include the distribution of wealth, investments, CEO compensation, decision-making, and social phase transitions.</p>
<p>Levy, M. &amp; Levy, H. Investment talent and the Pareto wealth distribution: Theoretical and experimental analysis.</p>
<h2>[HOW-TO]</h2>
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<h2>[REFERENCE]</h2>
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<li>] SRC = best-of-HN-2017-01-dd, comments</li>
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<h1 style="text-align: center;">&nbsp;</h1>

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