9 ms·

Huh. So I wrote the code, and ran the simulation. Now I get it. Investors: 100,000 Iterations: 100 Average worth after 100 iterations: $83.923 Average net wo

Huh. So I wrote the code, and ran the simulation. Now I get it. Investors: 100,000 Iterations: 100 Average worth after 100 iterations: $83.923 Average net worth increases. However the distribution of wealth is skewed dramatically. Winners: 13,704 (net worth of more than $1 at the end) Investors worth < $0.01: 53,935 What That Guy was worth (the investor who made the most money): $1,171,830.00 He flipped 71 heads and 29 tails. Median wealth of all investors: $0.00515378 What could have been made more clear in the presentation. Average wealth increases; but average log(wealth) decreases. Investors on the long improbable upper tail make huge amounts of money; investors on the lower tail just don't make much difference to the average, when they lose 40% of $0.01. What causes the wild income distribution: the fact that log(wealth) decreases on average. This doesn't decrease the total money supply, but it does increase the skewed distribution of wealth. It has nothing whatsoever to do with anything related to flipping consecutive heads and tails. And a great deal to do with the fact that the log(gain) is 0.405465 and the log loss is -0.510826. So the average investors log(wealth) decreases over time even though the average total wealth increases. Most figures are wildly variable from trial to trial. Most especially, what That Guy makes is highly variable. If he rolls 72 heads and 28 tails instead of 71 heads and 29 tails, then he's worth $2,565,000 more, and single-handedly adds $25.65 to the average net worth! The number of people who lose money is surprisingly, depressingly consistent. The obvious conclusion: increasing wealth concentration is an unavoidable consequence of capitalism that probably has very little to do with merit. The only solution: eat the rich.

ta1243 3y ago
Or you could redistribute wealth to even out the winner-takes-all part while still encouraging merit of some sort by having winner-takes-some
- waldothedog 3y ago
  Like a large(r) tax on upper incomes and capital gains??
drekipus 3y ago
> increasing wealth concentration is an unavoidable consequence of capitalism My bad I thought you made a coin flip simulation, not a capitalism simulation. At what point do we stop wagging the finger at the ghost of capitalism and just say it's mathematics? You don't hear people crying for the upheaval of mathematics
- AdamN 3y ago
  People do say that. Usually the critique of (perfect) capitalism is that it (structurally and mathematically) skews towards increasing wealth for winners at the expense of the rest of the population and that this is inevitable. Then the response of advocates against this situation is to either commit to more structures to prevent that outcome towards diluted (non-perfect) capitalism or other social forms (socialism, etc...)
  - _0ffh 3y ago
    I'd rather take my chances with the coin flips than with the politburo.
    - hgsgm 3y ago
      Why?
  - amelius 3y ago
    > skews towards increasing wealth for winners at the expense of the rest of the population The usual response against that is: what is wrong with being a winner? I did something right, let me have my well-deserved money. The problem with someone getting well-deserved money is that the money starts working against everybody else, so essentially this money gives everybody else negative money.
    - jncfhnb 3y ago
      Many times your money is not well deserved. Many times it’s due to luck, inheritance (see: luck), or dirty tactics. Regardless, the problem is very rarely that you “earned” money. Almost everyone is fine with you getting wages or perhaps entrepreneurial income. The problem is that wealth allows people to become more wealthy without really doing anything. Wealth compounds so that the rich get richer. And often the risk of financial loss is so low in a diversified portfolio that it’s basically a guaranteed win. See economic rent. IMO what people want is neither an income tax, nor a wealth tax, but an income tax rated on wealth. Wealth does get created over time, but despite this, the wealthy also take a continually larger share of the total pie. Society should be the one to get the bulk of passive wealth accumulation gains. Not individuals who happened to be wealthy. If you have a billion dollars, your income tax rate should be like 99%.
deleted 3y ago
[deleted]
Swenrekcah 3y ago
>The obvious conclusion: increasing wealth concentration is an unavoidable consequence of capitalism that probably has very little to do with merit. The only solution: eat the rich. This is exactly why we need progressive asset taxes. Income tax should be almost abolished, it can be something like 10% on all types of income and then nobody needs to bother with tax evasions on that. 5-15% VAT or sales tax to generate revenue for the places where people congregate and do their business, the rest of society should be funded by asset taxes.
- LeonB 3y ago
  Vat is irredeemably regressive. I suspect you know that. Income tax fails in its progressive goals not because it is inherently bad (like VAT) but because the tax laws are written by the richest players. (Ask a poor person how much influence they’ve had on tax law, and then ask a top 5 accountancy firm. This isn’t a controversial statement.)
  - Swenrekcah 3y ago
    I know VAT is regressive but if it is low enough it doesn't really matter. We do need revenue streams for municipalities and local governments and VAT can be a nice part of that. I would support a low flat income tax for two reasons. It is simple, if all income is taxed at 10% you just pay that and there are no opportunities (or frankly the need) for some fancy loopholes to avoid it. The second reason is that I do like the idea that everyone pays tax, it is part of being a citizen with all the rights and responsibilites that comes with it.
    - LeonB 3y ago
      I believe you, but it’s just incredibly naive. If “all things were equal” and there were no assumptions and we were all starting at an equal position there “may” be some merit in this position. But that’s just… nothing, absolutely nothing, like where we are. And if it seems like it’s fairly similar to where we are: your education has been very blinkered. I say that with compassion, btw. The scale of current inequality is so astronomical it’s beyond comprehension.
LeonB 3y ago
Imagine if — on top of that - we let the undeserving rich invest their wealth in things such as: - owning media - lobbying the government - owning the means of production It could take that dire situation and make it drastically worse. I mean, in theory.
- robertlagrant 3y ago
  > owning media Who should own media? Private people, or the state? > lobbying the government If lobbying the government is effective, it's either because the lobbying was correcting a wrong, or the government is allowing itself to be corrupted. > owning the means of production The "means of production" was barely relevant when Marx found out what a factory was from his factory-owning mate. A plumber owns "the means of production" when he owns his own tools. It's far too low resolution a phrase to be useful, except for anyone who finds it useful to teach people to hate another group of people.
  - LeonB 3y ago
    > Who should own media? Private people, or the state? I mean of course — who should own media.. we have precisely two choices, and no possibility to imagine anything else! What you’ve put forward is known as a false dichotomy. That is a situation where you present two options as if they are the only options. Oh wow — in your response Re government you have literally stated a dichotomy. Alright. I feel bad now. I have to let you know that there are more than two options (your preferred and a horrible alternative) in just about every situation in life. Please my friend - go out into the world and seek out the alternatives - they are infinite. This false dichotomy business is harmful to everyone around you. I agree that we should move beyond Marxist thought .. but I think we should be post Marxist not pre.
    - robertlagrant 3y ago
      Unless you're paid by the word, it'd be better to skip all that and state your third option.
robertlagrant 3y ago
> The only solution: eat the rich. Don't look at history when people did this, though. Just do it based on this simulation.
- shove 3y ago
  Nom nom nom
  - robertlagrant 3y ago
    You eat the rich and you're hungry again in an hour. And now there's no food.
    - shove 3y ago
      Yes we rich-eaters have been surviving on a mono-culture of rich folk and will surely starve without the rich who sacrifice themselves selflessly for our sustenance.
      - robertlagrant 3y ago
        Most people are rich because they own stock that's valuable, because they made or did something that's valuable. Collapse that chain and you replace value creation as a form of mild power with political ability as a way to access direct and high levels of power and things start going wrong fast[0][1][2]. [0] https://www.britannica.com/topic/Stalinism https://www.britannica.com/topic/Stalinism [1] https://en.wikipedia.org/wiki/Great_Leap_Forward#Consequences https://en.wikipedia.org/wiki/Great_Leap_Forward#Consequence... [2] https://en.wikipedia.org/wiki/Venezuela#Suspension_of_constitutional_rights https://en.wikipedia.org/wiki/Venezuela#Suspension_of_consti...
        TheCleric 3y ago
        > Most people are rich ... because they made or did something that's valuable. This assumption is doing a LOT of heavy lifting here.
credit_guy 3y ago
> The obvious conclusion: increasing wealth concentration is an unavoidable consequence of capitalism that probably has very little to do with merit. Not really. P implies Q is not the same as Q implies P. The fact that you can get a large gap between rich an poor with pure coin toss does not mean that when you have such a gap the gap resulted from pure randomness. It could have resulted from any combination of merit, hard work, inheritance, cheating, and luck. Your conclusion simply does not follow.
- svnt 3y ago
  If you change the equation slightly and place a fixed resource consumption requirement (take 1-10% of the initial amount to pay to flip a coin) on each person’s continuation, and then unevenly distribute the initial balance, it will become apparent that your ability to become “that guy” is dominantly determined by your initial balance. In this version people do not end up at some small fraction of the initial balance but instead they go negative, i.e. exit the simulation to homelessness. The ability to keep flipping the coin without starving is absolutely the primary determinant.
  - credit_guy 3y ago
    With the wrong analogy you can prove anything. In this analogy the coin flip results in 150% your net worth or 60%. In real life, we make thousands of decision per day, but very few people make a single decision like that in their entire life. And this analogy goes for 1000 such decisions. In the real world, most of our decisions are not like a coin toss actually: if I do this homework, I might become a bit smarter and boost my lifelong learnings by 0.001%, and if I don't I will enjoy an extra half an hou of TikTok. The outcome is anything but a coin toss, still most kids go for the second choice. The kids who go consistently for the first will end up in the top 1%, but unfortunately, they'll hear from their TikTok-loving friends that their success is just due to pure coin flips.
    - svnt 3y ago
      Your first sentence is correct. The idea that the choice of homework vs TikTok is the choice of wealth vs destitution is a valid concept for relatively low values of income, generally within the realm of working for other people. This is because performance on homework is not necessary and not sufficient for actual wealth, only for a relatively safe employment outcome. What we are talking about is making major bets on all the wealth you have accrued to date. To the point where a single major bet moves the global average wealth. If your homework told you how to build the next Amazon/Tesla/Facebook after having enough money to start it, then it is relevant to this wealth discussion. Otherwise it is just a myth that got you to a relatively healthy, stable income.
ano-ther 3y ago
> Average wealth increases; but average log(wealth) decreases What’s the mathematical rationale (or intuition) for looking at the log values? I don’t quite understand what they represent.
- joncrocks 3y ago
  It's reducing the impact of the outliers. e.g. x = 60, 10, 10, 10, 10 avg. x = 20 avg log(x) = 1.1556 (which is 10^1.1556 = 14.3)
- twobitshifter 3y ago
  Log is useful for repeated trials, since it’s a way of looking at exponential growth. If you write out the formula for a repeated trial, you’ll get an exponential function. Log tells you the value of the exponent a in e^at.
- kgwgk 3y ago
  Multiplication becomes addition after you take logs. That makes many things easier to understand and manipulate. Exponential trends become linear. The geometric random walk where you multiply by X or divide by Y with equal probability becomes an additive random walk where you add log(X) or substract log(Y) and you can represent that as a standard random walk (where the up and down steps have the same magnitude and probability) plus a trend.
- n2d4 3y ago
  The other people gave good intuition on why the logarithm is good but not on why the logarithm is the best choice. For example, max(sqrt(EV)) would also reduce outliers. There is a more mathematical way akin to the original derivation of the Kelly criterion [1]. Let's compare two strategies, max(EV) and max(log(EV)). Our game is coin-toss with heads=+50%/tails=-40% payouts and infinite repetitions; max(EV) would always go all-in, while max(log(EV)) would only bet a fraction of its current wealth at each turn. - After the first turn, there are two cases; if heads, max(EV) has a higher payout, if tails, max(log(EV)) has a higher payout. On average, max(EV) has a higher payout because it went all-in, and there's a positive EV per toss. - After two turns, there are four cases; in one of them (heads-heads), max(EV) has a higher payout, and in the other three, max(log(EV)) does. The latter is hence the "safer" choice. However, in the 25% chance that max(EV) wins, it has significantly more money than max(log(EV)), so the average (not median) payout is higher for max(EV). - This repeats, and after more and more repetitions, the chance that max(log(EV)) has a higher payout converges towards 1. Note that the payout for max(EV) in the (very!) rare case that it gets lucky skyrockets at an even faster speed, so on average, max(EV) still has a higher payout. - Turns out this is not just true for max(EV) and max(log(EV)), but in fact max(log(EV)) always maximizes the chance of higher payouts, given enough repetitions. So, in other words, max(EV) maximizes the average payout, while max(log(EV)) maximizes the chance of having a higher payout than any other strategy. The original Kelly paper has more precise maths, but I hope this helps to guide you. [1] https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion
haktai 3y ago
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Fredkin 3y ago
Except, in your simulation you only consider accumulation of dollar amounts. Pure gambling, wealth in a vacuum. Calling these dollar amounts 'wealth' is not helpful because they need to have purchasing power, there need to be goods and services to buy, otherwise they're just meaningless entries in a ledger, bits of paper (see Zimbabwe). It's wrong to dismiss capitalism on the basis of this simulation. In the real world there are usually side effects to these 'bets'. For example, a person, who is already rich, uses their wealth to purchase a factory and produce goods at a dollar price in the hope to earn more wealth. Those goods might be rejected by the market, but if accepted, they receive dollars and the rest of the world receives goods. The factory owner can only receive the dollars if others can afford to buy them. This means there is another road to ruin - fail to produce anything people want at a price they can afford and you'll soon go bust. The buyers who receive goods in exchange for money, particularly durable labor saving goods like dishwashers/fridges/cars/computers, are surely more wealthy in some sense? In addition, the factory owner might make tools/machinery that enables other entrepreneurs to make stuff too. Also consider ongoing costs, that capital has to be replaced (things break!), unexpected bumps in the road, finite lifespan, waste, and so on. Which leads me to our current system: the rich have got richer through financialization, government lobbying, zero-interest financing et.c, that has allowed them to acquire assets that appreciate without a substantial increase in production. The solution is to make rich people take much bigger, potentially ruinous, risks with their wealth on production instead of financial chicanery. More abundant goods and technology are the payoff while failure leads to liquidation of their assets, making assets more accessible to everyone else who might need them. Deflation, and crashes are a feature, not a bug. Inflationism, stimulus, cheap money et.c helps protect workers in the short term during a downturn, but prolonged stimulus makes assets unaffordable. Worse it causes huge misallocations of capital into unproductive endeavors at no risk to the investor. My belief is you don't 'prop-up' the big fish using the government/central bank. Then yes, you may still have inequality, but it won't be nearly as static, but more dynamic. i.e there may always be an extreme power law wealth distribution, but what's more important is there's regular turnover at the top and nobody spends too long in the top or the tail.
twobitshifter 3y ago
My somewhat controversial opinion is even if success were based on merit, this is still random chance since merit depends on one being born with ability in a supporting environment. Meritocracy can be social Darwinism.
sobriquet9 3y ago
> The only solution: eat the rich. The only? Maybe not bet 100% of your wealth every time? That's what Kelly criterion is about.
- eli_gottlieb 3y ago
  You have to have enough in the first place that trying to support yourself isn't betting 100% of your wealth.
  - sobriquet9 3y ago
    If you have nothing in your checking account, it does not mean your wealth is zero. In real life you can earn more money, in the given example you can't.
    - Timon3 3y ago
      In real life you can also have negative money. In real life you can live paycheck to paycheck. In real life you can have costs higher than your earnings.
      - sobriquet9 3y ago
        If you have no money to bet, the example is not applicable.
- coryfklein 3y ago
  Uh do you mean "bet 0% of your wealth every time"? Or does betting some number greater than 0% lead to net positive expected gains for an individual?
  - sobriquet9 3y ago
    Kelly criterion defines the optimum ratio.
    - 3y ago
sershe 3y ago
The whole experiment takes as a premise that merit doesn't matter (coin toss)... and arrives to the obvious conclusion that merit doesn't matter. Especially since, as someone indicates in another top level comment, the percentages are not even chosen properly, gambling on absolute money is a dumb choice, one should only gamble on log-money. So, a bunch of people making a dumb gamble with no merit involved produce a distribution. I don't understand why anybody at all cares about this - it's just garbage in, garbage out. The only real-world connection one could make is... don't play lottery, I guess? Oh wait I do understand why people care - that's because this "supports" a social conclusion they already pre-supposed.
daveFNbuck 3y ago
I think the key thing you're missing here is that they were talking about behavior as the number of flips goes to infinity. That long improbable upper end becomes more and more improbable over time. As time goes to infinity, the probability of being in it goes to 0. With a finite population, everyone is ruined. I ran the same simulation as you. After 100 iterations, the richest one had $71. After another 1,000 iterations, the richest one had $78 (of a total $133). After another 10,000 iterations, the richest one had 10^-165 dollars. They were still an extreme outlier with 95% of the total wealth, but he had almost nothing.
- kgwgk 3y ago
  > With a finite population, everyone is ruined. With high probability.
  - daveFNbuck 3y ago
    With probability 1 as time goes to infinity.
    - kgwgk 3y ago
      Right, the probability approaches one as time goes to infinity. I didn’t mean to imply otherwise.
DrScientist 3y ago
He mentions some solutions in the linked articles - and basically it involves pooling risk. In concrete terms I guess that means such things as re-distributive taxes ( either on death or through life ) - pooled pension funds, insurance, family and friends etc etc.
AtlasBarfed 3y ago
Okay, so aside from the cool terms (ergodicity, which... well whatever), what I think is really going on here is that the results of the iterative system, which intuitively appear to be a normally distributed value distribution for "not large" iterations, actually is NOT. Since it is actually a very not-normal distribution, the typical concepts of "mean", "median", and "std deviation" (which AFAIK isn't even really mentioned and would be meaningful) are warped to the point of meaninglessness. Of course economics being essentially a social science with some math and therefore defaults to thinking in typical normal distribution assumptions, won't naturally deal with that sort of pattern. And while I agree game theory (and this is a game) is relevant to economic study, the fact is that real world "games" like wealth distribution has a vast chasm of chaos/randomness/nonlinearity that blocks things like this or the "pirate distribution" game and others. Distrubingly, the games are parroted in some either overt or subvert manner to justify the distribution of wealth in the current 30 year era. "It's the natural way of economics and mathematics, how dare you chop off my head in the guillotine!" And yet "Some men want to watch the world burn". The elite also love the "great man" theory of history, because they are, of course, great men. But bring up the revolutionaries, and suddenly they don't like those pet ideas.
Etherlord87 3y ago
Why make it about the rich. Your statistic doesn't magically change if you change the starting $1 to something else. And to put the phenomena in much simpler words: flipping a coin once is good, having $100 bucks you either lose $40 or get $60, on average you get $10, and you win half of the time. The problem is if you have to flip a coin at least twice, because then the accumulated multiplier of your value, rather than .6 / 1.5 becomes: .6 / .9 / .9 / 2.25 So while on average you gain 16.25% of value, you are a winner only ¼ of the time, and it gets better/worse depending on average gain / chance to gain. …And apparently, what I learned just now, since your chance to gain approaches 0, for a finite population and infinite time, the chance approaches 0, therefore rendering the average gain to also be 0.

ta1243 3y ago

Or you could redistribute wealth to even out the winner-takes-all part while still encouraging merit of some sort by having winner-takes-some

waldothedog 3y ago
Like a large(r) tax on upper incomes and capital gains??

drekipus 3y ago

> increasing wealth concentration is an unavoidable consequence of capitalism My bad I thought you made a coin flip simulation, not a capitalism simulation. At what point do we stop wagging the finger at the ghost of capitalism and just say it's mathematics? You don't hear people crying for the upheaval of mathematics

AdamN 3y ago
People do say that. Usually the critique of (perfect) capitalism is that it (structurally and mathematically) skews towards increasing wealth for winners at the expense of the rest of the population and that this is inevitable. Then the response of advocates against this situation is to either commit to more structures to prevent that outcome towards diluted (non-perfect) capitalism or other social forms (socialism, etc...)
- _0ffh 3y ago
  I'd rather take my chances with the coin flips than with the politburo.
  - hgsgm 3y ago
    Why?
- amelius 3y ago
  > skews towards increasing wealth for winners at the expense of the rest of the population The usual response against that is: what is wrong with being a winner? I did something right, let me have my well-deserved money. The problem with someone getting well-deserved money is that the money starts working against everybody else, so essentially this money gives everybody else negative money.
  - jncfhnb 3y ago
    Many times your money is not well deserved. Many times it’s due to luck, inheritance (see: luck), or dirty tactics. Regardless, the problem is very rarely that you “earned” money. Almost everyone is fine with you getting wages or perhaps entrepreneurial income. The problem is that wealth allows people to become more wealthy without really doing anything. Wealth compounds so that the rich get richer. And often the risk of financial loss is so low in a diversified portfolio that it’s basically a guaranteed win. See economic rent. IMO what people want is neither an income tax, nor a wealth tax, but an income tax rated on wealth. Wealth does get created over time, but despite this, the wealthy also take a continually larger share of the total pie. Society should be the one to get the bulk of passive wealth accumulation gains. Not individuals who happened to be wealthy. If you have a billion dollars, your income tax rate should be like 99%.

deleted 3y ago

[deleted]

Swenrekcah 3y ago

>The obvious conclusion: increasing wealth concentration is an unavoidable consequence of capitalism that probably has very little to do with merit. The only solution: eat the rich. This is exactly why we need progressive asset taxes. Income tax should be almost abolished, it can be something like 10% on all types of income and then nobody needs to bother with tax evasions on that. 5-15% VAT or sales tax to generate revenue for the places where people congregate and do their business, the rest of society should be funded by asset taxes.

LeonB 3y ago
Vat is irredeemably regressive. I suspect you know that. Income tax fails in its progressive goals not because it is inherently bad (like VAT) but because the tax laws are written by the richest players. (Ask a poor person how much influence they’ve had on tax law, and then ask a top 5 accountancy firm. This isn’t a controversial statement.)
- Swenrekcah 3y ago
  I know VAT is regressive but if it is low enough it doesn't really matter. We do need revenue streams for municipalities and local governments and VAT can be a nice part of that. I would support a low flat income tax for two reasons. It is simple, if all income is taxed at 10% you just pay that and there are no opportunities (or frankly the need) for some fancy loopholes to avoid it. The second reason is that I do like the idea that everyone pays tax, it is part of being a citizen with all the rights and responsibilites that comes with it.
  - LeonB 3y ago
    I believe you, but it’s just incredibly naive. If “all things were equal” and there were no assumptions and we were all starting at an equal position there “may” be some merit in this position. But that’s just… nothing, absolutely nothing, like where we are. And if it seems like it’s fairly similar to where we are: your education has been very blinkered. I say that with compassion, btw. The scale of current inequality is so astronomical it’s beyond comprehension.

LeonB 3y ago

Imagine if — on top of that - we let the undeserving rich invest their wealth in things such as: - owning media - lobbying the government - owning the means of production It could take that dire situation and make it drastically worse. I mean, in theory.

robertlagrant 3y ago
> owning media Who should own media? Private people, or the state? > lobbying the government If lobbying the government is effective, it's either because the lobbying was correcting a wrong, or the government is allowing itself to be corrupted. > owning the means of production The "means of production" was barely relevant when Marx found out what a factory was from his factory-owning mate. A plumber owns "the means of production" when he owns his own tools. It's far too low resolution a phrase to be useful, except for anyone who finds it useful to teach people to hate another group of people.
- LeonB 3y ago
  > Who should own media? Private people, or the state? I mean of course — who should own media.. we have precisely two choices, and no possibility to imagine anything else! What you’ve put forward is known as a false dichotomy. That is a situation where you present two options as if they are the only options. Oh wow — in your response Re government you have literally stated a dichotomy. Alright. I feel bad now. I have to let you know that there are more than two options (your preferred and a horrible alternative) in just about every situation in life. Please my friend - go out into the world and seek out the alternatives - they are infinite. This false dichotomy business is harmful to everyone around you. I agree that we should move beyond Marxist thought .. but I think we should be post Marxist not pre.
  - robertlagrant 3y ago
    Unless you're paid by the word, it'd be better to skip all that and state your third option.

robertlagrant 3y ago

> The only solution: eat the rich. Don't look at history when people did this, though. Just do it based on this simulation.

shove 3y ago
Nom nom nom
- robertlagrant 3y ago
  You eat the rich and you're hungry again in an hour. And now there's no food.
  - shove 3y ago
    Yes we rich-eaters have been surviving on a mono-culture of rich folk and will surely starve without the rich who sacrifice themselves selflessly for our sustenance.
    - robertlagrant 3y ago
      Most people are rich because they own stock that's valuable, because they made or did something that's valuable. Collapse that chain and you replace value creation as a form of mild power with political ability as a way to access direct and high levels of power and things start going wrong fast[0][1][2]. [0] https://www.britannica.com/topic/Stalinism https://www.britannica.com/topic/Stalinism [1] https://en.wikipedia.org/wiki/Great_Leap_Forward#Consequences https://en.wikipedia.org/wiki/Great_Leap_Forward#Consequence... [2] https://en.wikipedia.org/wiki/Venezuela#Suspension_of_constitutional_rights https://en.wikipedia.org/wiki/Venezuela#Suspension_of_consti...
      - TheCleric 3y ago
        > Most people are rich ... because they made or did something that's valuable. This assumption is doing a LOT of heavy lifting here.

credit_guy 3y ago

> The obvious conclusion: increasing wealth concentration is an unavoidable consequence of capitalism that probably has very little to do with merit. Not really. P implies Q is not the same as Q implies P. The fact that you can get a large gap between rich an poor with pure coin toss does not mean that when you have such a gap the gap resulted from pure randomness. It could have resulted from any combination of merit, hard work, inheritance, cheating, and luck. Your conclusion simply does not follow.

svnt 3y ago
If you change the equation slightly and place a fixed resource consumption requirement (take 1-10% of the initial amount to pay to flip a coin) on each person’s continuation, and then unevenly distribute the initial balance, it will become apparent that your ability to become “that guy” is dominantly determined by your initial balance. In this version people do not end up at some small fraction of the initial balance but instead they go negative, i.e. exit the simulation to homelessness. The ability to keep flipping the coin without starving is absolutely the primary determinant.
- credit_guy 3y ago
  With the wrong analogy you can prove anything. In this analogy the coin flip results in 150% your net worth or 60%. In real life, we make thousands of decision per day, but very few people make a single decision like that in their entire life. And this analogy goes for 1000 such decisions. In the real world, most of our decisions are not like a coin toss actually: if I do this homework, I might become a bit smarter and boost my lifelong learnings by 0.001%, and if I don't I will enjoy an extra half an hou of TikTok. The outcome is anything but a coin toss, still most kids go for the second choice. The kids who go consistently for the first will end up in the top 1%, but unfortunately, they'll hear from their TikTok-loving friends that their success is just due to pure coin flips.
  - svnt 3y ago
    Your first sentence is correct. The idea that the choice of homework vs TikTok is the choice of wealth vs destitution is a valid concept for relatively low values of income, generally within the realm of working for other people. This is because performance on homework is not necessary and not sufficient for actual wealth, only for a relatively safe employment outcome. What we are talking about is making major bets on all the wealth you have accrued to date. To the point where a single major bet moves the global average wealth. If your homework told you how to build the next Amazon/Tesla/Facebook after having enough money to start it, then it is relevant to this wealth discussion. Otherwise it is just a myth that got you to a relatively healthy, stable income.

ano-ther 3y ago

> Average wealth increases; but average log(wealth) decreases What’s the mathematical rationale (or intuition) for looking at the log values? I don’t quite understand what they represent.

joncrocks 3y ago
It's reducing the impact of the outliers. e.g. x = 60, 10, 10, 10, 10 avg. x = 20 avg log(x) = 1.1556 (which is 10^1.1556 = 14.3)
twobitshifter 3y ago
Log is useful for repeated trials, since it’s a way of looking at exponential growth. If you write out the formula for a repeated trial, you’ll get an exponential function. Log tells you the value of the exponent a in e^at.
kgwgk 3y ago
Multiplication becomes addition after you take logs. That makes many things easier to understand and manipulate. Exponential trends become linear. The geometric random walk where you multiply by X or divide by Y with equal probability becomes an additive random walk where you add log(X) or substract log(Y) and you can represent that as a standard random walk (where the up and down steps have the same magnitude and probability) plus a trend.
n2d4 3y ago
The other people gave good intuition on why the logarithm is good but not on why the logarithm is the best choice. For example, max(sqrt(EV)) would also reduce outliers. There is a more mathematical way akin to the original derivation of the Kelly criterion [1]. Let's compare two strategies, max(EV) and max(log(EV)). Our game is coin-toss with heads=+50%/tails=-40% payouts and infinite repetitions; max(EV) would always go all-in, while max(log(EV)) would only bet a fraction of its current wealth at each turn. - After the first turn, there are two cases; if heads, max(EV) has a higher payout, if tails, max(log(EV)) has a higher payout. On average, max(EV) has a higher payout because it went all-in, and there's a positive EV per toss. - After two turns, there are four cases; in one of them (heads-heads), max(EV) has a higher payout, and in the other three, max(log(EV)) does. The latter is hence the "safer" choice. However, in the 25% chance that max(EV) wins, it has significantly more money than max(log(EV)), so the average (not median) payout is higher for max(EV). - This repeats, and after more and more repetitions, the chance that max(log(EV)) has a higher payout converges towards 1. Note that the payout for max(EV) in the (very!) rare case that it gets lucky skyrockets at an even faster speed, so on average, max(EV) still has a higher payout. - Turns out this is not just true for max(EV) and max(log(EV)), but in fact max(log(EV)) always maximizes the chance of higher payouts, given enough repetitions. So, in other words, max(EV) maximizes the average payout, while max(log(EV)) maximizes the chance of having a higher payout than any other strategy. The original Kelly paper has more precise maths, but I hope this helps to guide you. [1] https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion

haktai 3y ago

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Fredkin 3y ago

Except, in your simulation you only consider accumulation of dollar amounts. Pure gambling, wealth in a vacuum. Calling these dollar amounts 'wealth' is not helpful because they need to have purchasing power, there need to be goods and services to buy, otherwise they're just meaningless entries in a ledger, bits of paper (see Zimbabwe). It's wrong to dismiss capitalism on the basis of this simulation. In the real world there are usually side effects to these 'bets'. For example, a person, who is already rich, uses their wealth to purchase a factory and produce goods at a dollar price in the hope to earn more wealth. Those goods might be rejected by the market, but if accepted, they receive dollars and the rest of the world receives goods. The factory owner can only receive the dollars if others can afford to buy them. This means there is another road to ruin - fail to produce anything people want at a price they can afford and you'll soon go bust. The buyers who receive goods in exchange for money, particularly durable labor saving goods like dishwashers/fridges/cars/computers, are surely more wealthy in some sense? In addition, the factory owner might make tools/machinery that enables other entrepreneurs to make stuff too. Also consider ongoing costs, that capital has to be replaced (things break!), unexpected bumps in the road, finite lifespan, waste, and so on. Which leads me to our current system: the rich have got richer through financialization, government lobbying, zero-interest financing et.c, that has allowed them to acquire assets that appreciate without a substantial increase in production. The solution is to make rich people take much bigger, potentially ruinous, risks with their wealth on production instead of financial chicanery. More abundant goods and technology are the payoff while failure leads to liquidation of their assets, making assets more accessible to everyone else who might need them. Deflation, and crashes are a feature, not a bug. Inflationism, stimulus, cheap money et.c helps protect workers in the short term during a downturn, but prolonged stimulus makes assets unaffordable. Worse it causes huge misallocations of capital into unproductive endeavors at no risk to the investor. My belief is you don't 'prop-up' the big fish using the government/central bank. Then yes, you may still have inequality, but it won't be nearly as static, but more dynamic. i.e there may always be an extreme power law wealth distribution, but what's more important is there's regular turnover at the top and nobody spends too long in the top or the tail.

twobitshifter 3y ago

My somewhat controversial opinion is even if success were based on merit, this is still random chance since merit depends on one being born with ability in a supporting environment. Meritocracy can be social Darwinism.

sobriquet9 3y ago

> The only solution: eat the rich. The only? Maybe not bet 100% of your wealth every time? That's what Kelly criterion is about.

eli_gottlieb 3y ago
You have to have enough in the first place that trying to support yourself isn't betting 100% of your wealth.
- sobriquet9 3y ago
  If you have nothing in your checking account, it does not mean your wealth is zero. In real life you can earn more money, in the given example you can't.
  - Timon3 3y ago
    In real life you can also have negative money. In real life you can live paycheck to paycheck. In real life you can have costs higher than your earnings.
    - sobriquet9 3y ago
      If you have no money to bet, the example is not applicable.
coryfklein 3y ago
Uh do you mean "bet 0% of your wealth every time"? Or does betting some number greater than 0% lead to net positive expected gains for an individual?
- sobriquet9 3y ago
  Kelly criterion defines the optimum ratio.
  - 3y ago

sershe 3y ago

The whole experiment takes as a premise that merit doesn't matter (coin toss)... and arrives to the obvious conclusion that merit doesn't matter. Especially since, as someone indicates in another top level comment, the percentages are not even chosen properly, gambling on absolute money is a dumb choice, one should only gamble on log-money. So, a bunch of people making a dumb gamble with no merit involved produce a distribution. I don't understand why anybody at all cares about this - it's just garbage in, garbage out. The only real-world connection one could make is... don't play lottery, I guess? Oh wait I do understand why people care - that's because this "supports" a social conclusion they already pre-supposed.

daveFNbuck 3y ago

I think the key thing you're missing here is that they were talking about behavior as the number of flips goes to infinity. That long improbable upper end becomes more and more improbable over time. As time goes to infinity, the probability of being in it goes to 0. With a finite population, everyone is ruined. I ran the same simulation as you. After 100 iterations, the richest one had $71. After another 1,000 iterations, the richest one had $78 (of a total $133). After another 10,000 iterations, the richest one had 10^-165 dollars. They were still an extreme outlier with 95% of the total wealth, but he had almost nothing.

kgwgk 3y ago
> With a finite population, everyone is ruined. With high probability.
- daveFNbuck 3y ago
  With probability 1 as time goes to infinity.
  - kgwgk 3y ago
    Right, the probability approaches one as time goes to infinity. I didn’t mean to imply otherwise.

DrScientist 3y ago

He mentions some solutions in the linked articles - and basically it involves pooling risk. In concrete terms I guess that means such things as re-distributive taxes ( either on death or through life ) - pooled pension funds, insurance, family and friends etc etc.

AtlasBarfed 3y ago

Okay, so aside from the cool terms (ergodicity, which... well whatever), what I think is really going on here is that the results of the iterative system, which intuitively appear to be a normally distributed value distribution for "not large" iterations, actually is NOT. Since it is actually a very not-normal distribution, the typical concepts of "mean", "median", and "std deviation" (which AFAIK isn't even really mentioned and would be meaningful) are warped to the point of meaninglessness. Of course economics being essentially a social science with some math and therefore defaults to thinking in typical normal distribution assumptions, won't naturally deal with that sort of pattern. And while I agree game theory (and this is a game) is relevant to economic study, the fact is that real world "games" like wealth distribution has a vast chasm of chaos/randomness/nonlinearity that blocks things like this or the "pirate distribution" game and others. Distrubingly, the games are parroted in some either overt or subvert manner to justify the distribution of wealth in the current 30 year era. "It's the natural way of economics and mathematics, how dare you chop off my head in the guillotine!" And yet "Some men want to watch the world burn". The elite also love the "great man" theory of history, because they are, of course, great men. But bring up the revolutionaries, and suddenly they don't like those pet ideas.

Etherlord87 3y ago

Why make it about the rich. Your statistic doesn't magically change if you change the starting $1 to something else. And to put the phenomena in much simpler words: flipping a coin once is good, having $100 bucks you either lose $40 or get $60, on average you get $10, and you win half of the time. The problem is if you have to flip a coin at least twice, because then the accumulated multiplier of your value, rather than .6 / 1.5 becomes: .6 / .9 / .9 / 2.25 So while on average you gain 16.25% of value, you are a winner only ¼ of the time, and it gets better/worse depending on average gain / chance to gain. …And apparently, what I learned just now, since your chance to gain approaches 0, for a finite population and infinite time, the chance approaches 0, therefore rendering the average gain to also be 0.