Why luck plays a big role in making you rich8 min read . Updated: 01 Sep 2016, 05:40 PM IST
Cornell economist Robert Frank is alive today because his heart stopped on the right tennis court. He wants us all to know how fortunate we are.
New York: Robert Frank was playing tennis one cold Saturday morning in Ithaca, New York, when his heart stopped. Sudden cardiac arrest–a short-circuit in the heart’s electrical signalling—kills 98% of its victims and leaves most of the rest permanently impaired.
Yet two weeks later, Frank was back on the tennis court.
How did this happen? There was a car accident a few hundred yards away from where Frank collapsed. Two ambulances responded but the injuries were minor and only one was needed. The other ambulance, usually stationed five miles away, reached Frank in minutes.
“I’m alive today because of pure dumb luck," says Frank, a 71-year-old economics professor at Cornell University. Or you can call it a miracle. Either way, Frank can’t take credit for surviving that day. From coincidence or the divine, he got help. Nine years later, he is still grappling with the concept of luck. And, applied to his field of economics, it’s led him into some dangerous territory: Wealth.
Talk about luck and money in the same sentence, he says, and prepare to deal with “unbridled anger." US senator Elizabeth Warren of Massachusetts and President Barack Obama were pilloried for suggesting rich Americans should be grateful for what Obama called “this unbelievable American system that we have that allowed you to thrive." Even referring to the wealthy as “the luckiest among us"–as I did a few months ago–can spark some unhinged reactions.
“There are people who just don’t want to hear about the possibility that they didn’t do it all themselves," Frank says.
Mild-mannered and self-effacing, he isn’t about to tell the rich “you didn’t build that," as Obama did (and likely regretted). Frank’s new book, “Success and Luck: Good Fortune and the Myth of Meritocracy," is a study in diplomacy. Combining memoir with academic research, it’s an earnest argument that all of us—even the rich—would be better off recognizing how luck can lead to success.
You did build that—mostly
First, Frank wants to make clear, you did build that–for the most part. Bill Gates, Warren Buffett, or any other wildly successful person didn’t merely get lucky. “It’s clear that most of the biggest winners in the marketplace are both extremely talented and hardworking," he writes.
In fact, a prerequisite of success in many fields may be a strong refusal to believe in luck. The idea of “making your own luck" is great motivation, while nothing can kill your drive more than suspecting the game is rigged. The reality however is that luck does matter. It’s hard to see in your own life if things are going well: Frank says it’s like running with a tailwind, as opposed to a headwind.
It’s easier to see in aggregate statistics: In professional hockey leagues, researchers have noticed, 40% of players are born in the first three months of the year, while just 10% were born in October, November and December. The reason must be that 1 January is the birth date cut-off for youth hockey teams, Frank says, and older kids end up getting a lifelong advantage over their peers. A similar phenomenon has been found among CEOs. There are a third fewer chief executives born in June and July than you’d expect by chance. Kids born in the summer tend to be the youngest in their classes starting school.
The influence of your birthday—certainly something outside your control—may be small in the grand scheme of subsequent wealth and success. But even the most talented people in the world can point to coincidences that gave them a crucial edge. Frank cites the 60-year-old Gates: Despite growing up in the 1960s, the co-founder of Microsoft Corp. happened to attend the rare school that offered students unlimited access to computers.
Or consider the actor Bryan Cranston. After decades as a well-respected performer on television and film, the series Breaking Bad made Cranston, 60, a true star. But, Frank notes, Cranston almost didn’t get to play the show’s central character, Walter White. Both John Cusack and Matthew Broderick turned down the role before producers agreed to offer it to the less famous Cranston. “You can have talent, perseverance, patience, but without luck you will not have a successful career," the actor has said.
Could Cranston or Gates have achieved wealth and fame without these lucky breaks? Of course it’s possible. But Frank’s thesis is that our economy is changing in ways that amplify the role of luck in making the difference.
For more than 20 years, Frank has been studying the rise of winner-take-all markets—fields of fierce economic competition where only a few top performers take home the bulk of the rewards. More and more of the economy is starting to look like sports or music, Frank says, where millions of people compete and the winners are paid thousands of times more than the runners-up.
Another example he gives is the humble neighbourhood accountant. In the 20th century, the typical accountant was competing against nearby rivals. If you worked hard, there was a good chance of winning over the most lucrative clients in town. Today, neighbourhood accountants face much more competition: Sophisticated global accounting firms can swoop in and sign up their biggest clients. Tax preparation, an accountant’s bread-and-butter, has been mostly swallowed up by two large players—H&R Block for storefront preparation and TurboTax online.
“Technology has enabled people who are best at what they do to extend their reach geographically," Frank says. TurboTax was initially just one of a number of tax software programs on the market. But, as happened with search engines and social media sites, it was able to win over customers early and its competitive advantage snowballed. TurboTax now dominates online tax preparation—thousands of local accountants replaced by one company.
In these winner-take-all markets, luck can play a huge role. A simulation conducted by Frank shows how: Imagine a tournament in which every contestant is randomly assigned a score representing their skill. In this simple scenario, the most skilled person wins. The more competitors there are, the higher the score the winner will likely have.
Now, introduce chance by randomly assigning each participant a “luck" score. However, that score can only play a tiny role in the ultimate outcome, just 2% compared with 98% allotted to skill. This minor role for chance is enough to tilt the contest away from the top-skilled people. In a simulation with 1,000 participants, the person with the top skill score only prevailed 22% of the time. The more competition there is, the hardest it is for skill alone to win out. With 100,000 participants, the most skilled person wins just 6% of the time.
“Winning a competition with a large number of contestants requires that almost everything go right. And that, in turn, means that even when luck counts for only a trivial part of overall performance, there’s rarely a winner who wasn’t also very lucky."
Winner-take-all markets can end up creating vast wealth differences between the lucky and unlucky. One person—smart, persistent, but unlucky—struggles, while an equally (or even slightly less) talented and hard-working person gets a lucky break that can reap millions, or billions, of dollars.
How to make things fair? Guess
We can’t control our luck, so what else can we do? Frank says the only solution is to invest more in education and infrastructure and all the other things we know help everyone succeed. The more we spend on these public goods, the more people have a chance to get lucky, he says. That, of course, means higher taxes. But Frank, ever diplomatic, assures the wealthy that this won’t hurt nearly as much as they might fear.
Which would you rather drive, he asks, a $150,000 Porsche on a well-maintained highway, or a $333,000 Ferrari on roads with deep potholes? The question scores a couple points. First, Frank is arguing, everyone benefits if we invest more in the general public welfare, including the rich. Second, we need to think more about the difference between a $150,000 car and a $333,000 car.
The increasing concentration of wealth at the top of economic spectrum has created fierce competition for the finer things. “It’s not that people are jealous or want to outdo each other," Frank says. It’s just that everyone’s expectations have skyrocketed–how fast a car should be, how large a home to build, or how elaborate your wedding can be. It’s hard to throw a $4,000 reception when everyone in your social circle is spending $100,000.
Frank likens us to male elk, who’ve evolved to grow huge antlers only because they provide an extra advantage in winning mates. If every bull elk could shrink their antlers at once, they’d find it easier to walk through the woods and escape predators. Instead, they’re stuck in a “positional arms race."
For humans at least, tax policy could help de-escalate this wasteful competition, Frank says. He proposes a progressive consumption tax, one that would tax how much people spend by giving tax breaks for money they saved. The wealthy would pay more in taxes, sure, but it wouldn’t hurt as much as they think. If everyone else in your income tax bracket also owes more to the Internal Revenue Service, you still maintain your “relative position" in the hierarchy.
The most successful people will still be able to afford the best stuff–the waterfront homes, the front-row seats, the haute couture—but they’ll feel less pressure to spend and they’ll have less competition for the rarest luxury goods.
Frank knows this argument is a hard sell. But some perspective helps: The political consensus can flip rapidly if good arguments are offered, he contends. And so he wants to spend the rest of his life—the extra years he was given on that tennis court nine years ago—explaining how much better off we’d be if we acknowledged our luck.
“The fact that anyone exists at all is so astronomically improbable," Frank says. “The fact that you’re here to live and breathe and enjoy a sunset–what an unbelievably unlikely thing." Bloomberg