3 ms·
Wealth follows a power law because there is a positive feedback loop. Having some wealth makes it easier to get more wealth. So, if you're smart/lucky enough to
by imgabe 5y ago
Wealth follows a power law because there is a positive feedback loop. Having some wealth makes it easier to get more wealth. So, if you're smart/lucky enough to get a bit of wealth, you can continue to use whatever smarts you have to get more.
The article seems to imply that since other human traits follow normal distributions, then wealth distribution should also be normal if it's determined by human traits. But that doesn't follow because it ignores feedback. Being a little tall doesn't help you get more tall. Most human traits don't reinforce themselves the way wealth does. A smart person with a million dollars can make money a lot more easily than a smart person with zero dollars. A smart person with a billion dollars can do even more.
- raghavbali 5y agoyou just nailed it with the power law example. But how would you explain the _rags-to-riches_ scenario?
- imgabe 5y agoIt's easier to make money if you have money, but it's not impossible to make money if you don't. A flash of genius and/or stroke of luck can still take you from no money to some money, and if you continue applying skill and have reasonable luck (and take steps to mitigate bad luck) then it will only get easier to make more money. Then you'll also be able to set up your kids to start in a luckier position.
- pydry 5y agoRags to riches is rare. It's a compelling origin story though. Past financial hardship can be spun as rags quite easily, so we hear the story a lot more than it "really" happens.
- refurb 5y agoBut if you look at the distribution where some people have 1,000x the median wealth it’s usually not because they slowly built it up over time but rather had 1 or maybe 2 massive exits. I would say wealth follows a normal distribution if you’re looking at number of people at each level. Very few people have <$0 over their lifetime and a same small number have >$25M over their lifetime. But the outliers are so extreme at the top end you end up with the power distribution of wealth.
- kubb 5y agoMost wealth in the world is inherited and grows over generations.
- Ginden 5y ago> Most wealth in the world is inherited and grows over generations. According to "Inheritances and the Distribution of Wealth Or Whatever Happened to the Great Inheritance Boom?": > Of the total wealth of the population, Kessler and Masson estimated that 35 percent originated from inheritances or gifts. Among those who had reported receiving an intergenerational transfer (who were about two and a half times richer than the average household), the corresponding proportion was 40 percent. This proportion will probably drop if we exclude land.
- kubb 5y agoSounds about right. Add compounding stock gains on the inherited wealth, rent and growing land prices, and you'll have more than half. > This proportion will probably drop if we exclude land. Sure and if we exclude stocks it will drop further, but there's no reason to exclude land, the single most important form of property, from the calculation.
- piva00 5y agoWhy would one exclude land from the calculation though?
- Ginden 5y agoIt can skew results, because poor (by income) people can own some wealth in land, because they don't want to sell it for legal or sentimental reasons. My own grandmother keeps some wasteland, because she believes that someday her children (medical professionals) will farm it.
- refurb 5y agoPretty sure there was a US study that said most billionaire are first generation.
- amelius 5y ago> Wealth follows a power law because there is a positive feedback loop. You even get a power law if you have a game where everybody gives 1 dollar to a random person (if possible). If you play that game for enough steps, then the wealth distribution becomes exponential.