Are super-rich people just better at making money?

There are two core insights here that are actually pretty obvious:<p>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.<p>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.<p>As others have pointed out this is really not a good description of the economy as a whole due to its zero-sum assumption.<p>However I think it’s a relatively useful analogy for the stock market and how other passive investment markets work.<p>Passive investment is a larger percentage of the economy than ever before and is increasingly how the “rich get richer.”<p>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.<p>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.

This yard-sale model isn&#x27;t really how the economy works though, people don&#x27;t continuously bet 20% of their net worth. It&#x27;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.<p>In a normal distribution, the shape of the distribution comes from a &quot;random walk&quot; left and right from a large number of steps of varying size.<p>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.<p>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&#x27;s all multiplicative.<p>The lognormal distribution also has a fatter &quot;right tail&quot; than a Gaussian, which is what we see IRL.

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.<p>&gt; What can the yard sale model tell us?<p>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.<p>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.<p>The author could have easily Googled the price for the exorbitant watch before they bought it. That’s entirely on them.

To solve all this, it&#x27;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&amp;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&amp;D and then act abused when asked to help give back.<p>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.<p>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.

This smells misleading &#x2F; overly simplistic but I can’t quite quite put my finger on precisely why?<p>Some thoughts<p>- consensual trades are win win (you want a sandwich, I want $5 let’s trade! And we both win)<p>- 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).

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.<p>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.

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.

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.<p>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&#x27;t a bad thing. It means they&#x27;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&#x27;s just that U.S. politicians lack the will.<p>Existentially, I believe that power corrupts. Billionaires are billionaires because they created a lot of value for society. Great. But once they&#x27;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.

Regardless of the rest, I like how this article shows the relationship of it&#x27;s not the same bet to get back to where you started. I&#x27;ve observed very similar mistakes a number of times in how that % relationship works.<p>It really reminds me of Eve Online. It&#x27;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&#x27;t be countered. Most worked like a +1&#x2F;-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&#x27;t get you back to where you started, the opposite increase is 100%. 20 - 50% = 10. 10 + 50% = 15, not 20.<p>Another one is for the property I live in, we&#x27;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%.

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&#x27;s money, or atleast all of what they are willing to risk.

There are so many wealth making opportunities that give more than literally <i>zero</i> expected value, and don&#x27;t require 20% of your wealth.<p>You can become rich by following the rules of expected value and compound interest.<p>Backtest this against the population and tell me that people today wouldn&#x27;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 <i>compound interest</i>. This is so unpalatable for some people that they argue against sound decision making and reduce wealth creation to coin flips.

Unless you come from a wealthy situation, the only way to get rich is luck. That&#x27;s it.<p>Hard work is worthless, just ask people in the third-world work 18 hours for a pittance to survive.<p>Of course luck may require certain knowledge, wherewithal and timing. You don&#x27;t win a lotto without waking up at the right time, driving to the right shop and buying the right ticket.

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&#x27;s more of them than smart people with a good strategy. It also applies in the opposite direction, there&#x27;s more unlucky average people than true failures.

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 &quot;boots theory&quot; - 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.<p>The latter is the elephant in the room, IMO: once you hit 1 million dollars net worth, even a <i>very conservative</i> investment aka government bonds at 1% yields 10.000$ a year, at 5 million dollars it&#x27;s 50.000$ a year, and at 10 million dollars, it&#x27;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&#x27;re not actually <i>losing</i> money or spending over the yield of your investments, you literally cannot fail any more. You and your children won&#x27;t ever experience being poor or homeless.<p>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&#x27;re out of a million dollars but your other conservative investments will make that back in a year.

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&#x2F;decrease about half of the time right. So using this model you will lose money in the long run. Or did I miss something?<p>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.

Isn&#x27;t this just the old concept of the &quot;Gambler&#x27;s Ruin&quot;? <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Gambler%27s_ruin" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Gambler%27s_ruin</a>

Ha, well that didn&#x27;t go as expected!<p><a href="https:&#x2F;&#x2F;imgur.com&#x2F;a&#x2F;uyXjs1N" rel="nofollow">https:&#x2F;&#x2F;imgur.com&#x2F;a&#x2F;uyXjs1N</a><p>I do appreciate an interactive example that doesn&#x27;t have a canned result :-)

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....

I love explorables! Simple model but good to see.<p>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

Money follows money.<p>If I have 10€ and I make 1% profit, I&#x27;ve made a whopping 1€. Now I can buy a few potatoes.<p>Someone with 1M€ makes the same amount of profit, now they have 10 000€. That&#x27;s a good few months of living expenses for the regular person.<p>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.

An archived PDF version of the paper mentioned can be found here: <a href="https:&#x2F;&#x2F;web.archive.org&#x2F;web&#x2F;20100527181035&#x2F;http:&#x2F;&#x2F;www.cmth.bnl.gov&#x2F;~anirban&#x2F;papers&#x2F;ac3.pdf" rel="nofollow">https:&#x2F;&#x2F;web.archive.org&#x2F;web&#x2F;20100527181035&#x2F;http:&#x2F;&#x2F;www.cmth.b...</a>

If resources would be distributed evenly, would society be better?<p>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.<p>There was &#x27;Ask HN: How might HN build a social network together?&#x27;[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?<p>[1] <a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=33999296" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=33999296</a>

What&#x27;s wrong about it? Unless you also &quot;defund the police&quot;, that is. If law enforcement is well-funded and works well - which isn&#x27;t all that expensive or hard on a national scale - than what&#x27;s the problem about extreme inequality?

Of course! But <i>MY</i> favourite billionaire is definitely not like the other billionaires..

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.

What is the optimal size of a bet? This is called &quot;Kelly bet&quot;. 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.<p>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&#x27;s what experienced traders do--just reduce your position by 50 percent; inexperienced&#x2F;retail traders tend to increase their position, when things go against them.

Cool interactions on mobile.<p>But the poor vs rich game ended up with the poor person going up to $1000 and the rich person going down below $100.<p>I recognize it&#x27;s just chance... but it&#x27;s funny that the results directly conflicted the author&#x27;s point.

This focus on super-rich individuals is totally misguided. What&#x27;s important is the economic system. Rich individuals are simply a nauseating side-effect of capitalism. Nobody really likes it, but there simply isn&#x27;t anything better. The burden of proof is on the complainers. Even Marxist-sympathetic Peter Singer gets it.<p>&gt;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.<p><a href="http:&#x2F;&#x2F;archive.today&#x2F;2021.04.25-160837&#x2F;https:&#x2F;&#x2F;www.newyorker.com&#x2F;culture&#x2F;the-new-yorker-interview&#x2F;peter-singer-is-committed-to-controversial-ideas" rel="nofollow">http:&#x2F;&#x2F;archive.today&#x2F;2021.04.25-160837&#x2F;https:&#x2F;&#x2F;www.newyorker...</a>

It’s hilarious that the author blames the yard sale model for their never earning money on vintage watches.<p>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.<p>Many markets follow pro basketball player distribution, and unless you believe that steph curry is getting lucky on every shot, implies different model.

The thought process of blaming all social problems on random outcomes, and marginalize the individual&#x27;s volition, itself is a fallacy.

Unfortunately, it’s a simulation.<p>Coin flip is pure luck, so there’s no accountability in losing the game. Hence, redistributing the wealth sounds like a fair idea.<p>The catch is that some people actually believe in luck, so they believe accountability doesn’t count.<p>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?

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):<p><a href="https:&#x2F;&#x2F;www.goodreads.com&#x2F;book&#x2F;show&#x2F;39979237-moneyland" rel="nofollow">https:&#x2F;&#x2F;www.goodreads.com&#x2F;book&#x2F;show&#x2F;39979237-moneyland</a>

Haha this example is so obvious what happens in one MMORPG game I used to play<p>There is hazard game dice where you have 50% chance to win<p>But people who run those &quot;casinos&quot; figured many years ago that they will use e.g 90 95% payouts<p>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

&quot;To make 100 dollars into 110 dollars, this is work. To make 100 million into 110 million, this is inevitable.&quot;

Does this article also happen to be Robinhood&#x27;s investment pitch and business model?

I don&#x27;t understand why Jon doesn&#x27;t lose the $240. Because isn&#x27;t that what he risked to get his opponent&#x27;s (&quot;me&quot;) $160? Conversely, &quot;me&quot; should&#x27;ve ended up with $1040 and Jon with $960.

No.<p>Money is better at making money. The system is designed to do this.<p>If you&#x27;re making money with your labor, you are at a gigantic disadvantage compared to those who are making their money by investing capital.

binomial distribution re-branded as &quot;Yard-sale model&quot;

Just read this<p><a href="http:&#x2F;&#x2F;www.paulgraham.com&#x2F;wealth.html" rel="nofollow">http:&#x2F;&#x2F;www.paulgraham.com&#x2F;wealth.html</a>

No, rich people think about money, debt, and cash flow very differently.<p>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&#x27;ve made it impossible for competing banks to enter the market through lobbied regulation that came as a response to their bad behavior.<p>Read up about the creation of the fed, what they&#x27;ve done, how many bailouts they&#x27;ve done, how many people were held accountable, you&#x27;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.<p>Worse, many people immediately jump to something along the lines of &quot;well that&#x27;s people being greedy and its a downside of capitalism and we have to do something about that&quot;.<p>The problem with those people is, they don&#x27;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.

They&#x27;re better at getting government to give them large sums of money too.

Well… except that many super rich had failed businesses, went bankrupt etc?<p>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.

Yes, because R &gt; G.<p>That&#x27;s really all there is to it.

No. It&#x27;s momentum and inertia.

This is a dishonest piece. It ignores that it&#x27;s based on a zero-sum game and the world isn&#x27;t zero sum. The quoted economists know that very well.<p>I like that the coin flip game illustrates the concept of compounding interest, but it doesn&#x27;t model wealth creation at all.<p>Most new ventures aren&#x27;t I-win-you-lose, they&#x27;re we-win-or-I-lose. Wealthy people really can take bigger bets more frequently like the article suggests, but it&#x27;s not necessarily at the expense of everyone else.<p>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.<p>If you think this game through, you&#x27;ll still end up with super wealthy outliers and bankruptcies, but the players in the game actually have some agency.

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.<p>Intuitively, it seems like everyone is making a fair bet because you&#x27;re equally likely to win or lose. If you have an initial net worth of $1000 and flip a coin you&#x27;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&#x27;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&#x27;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.<p>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: <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Kelly_criterion#Proof" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Kelly_criterion#Proof</a><p>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:<p><pre><code> 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 </code></pre> So the long term geometric return of playing this game is 0.999, and since it&#x27;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&#x27;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 &quot;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&#x27;s losses&quot;, which is obviously going to result in rich people being favored and gaining money.<p>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&#x27;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&#x27;t seem like a critique on capitalism or inequality, it&#x27;s more analogous gambling at a casino.<p>----<p>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.

The trick IMO is to use your extended family as a network and try to keep things within the network.<p>People don&#x27;t like this but not only does it work well it&#x27;s often more efficient in general.

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

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.

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