The 1 Percent Rule: Why a Few People Get Most of the Rewards
jamesclear.com
jamesclear.com
It's worth considering that from the cellular point of view, cancer is extremely 'successful.' But at the human level, discovering a tumor is not a cause for celebration, but for anxiety and further investigation. Some tumors are benign, and can be thought of as a mere excess of a good thing causing only cosmetic or minor discomfort. Others are malignant, actively reproducing themselves to excess and pulling all the body's resources towards themselves, disregarding the health of the host body but without creating any sort of value (because of the impossibility of reproducing itself independently of its originating context). A benign cancer is tolerable; a malignant one must be excised or it will kill the host.
(This might seem like a hand-wavey objection, but systems biology suggests that Pareto effects show up in the development of cancers just as in many other natural systems, eg http://journals.plos.org/plosone/article?id=10.1371/journal.... )
We should not fall into the trap of assuming that just because a social phenomenon instantiates some natural behavior, that it is therefore a Good Thing, aka the naturalistic fallacy. Nature is inherently fractal, and extreme outcomes may be instances of local maxima that are suboptimal from the perspective of the system as a whole.
The Soviet system may have paid lip service to communist and socialist ideals, but it seems as if there was a strong capitalist element in there: people who felt they worked hard believed they were entitled to more than others, and (ab)used their positions to make this happen.
It is true that class warfare in any direction leads to social instability and discontentment. Everyone should feel that the basic resources they need to survive are attainable. I think that most successful societies, have, for the most part, had that covered.
1929 is likewise pathetic compared to the french revolution. There was no large government structure or leadership change as a result.
I can't give you a general definition of what is good. In matters of interpersonal relations or politics I'm in favor equitable rather than equal outcomes; one could invert the standard utilitarian definition to being the least harm for the smallest number, which (imho) has considerably different implications for decision-making. Most people would classify this as a form of socialism and I'd be OK with that, but I mean it in the sense of a moral socialism than an operational or economic socialism with the connotations of central planning and so forth, which I reject.
Personally, I'm mystic and artistic, and adhere to an eccentric esotericism. I apologize for the frustrations that must result.
Do we really?
We have control over how society's feedback mechanisms are structured
Income distribution is a textbook wicked problem: https://en.wikipedia.org/wiki/Wicked_problem
My view is that income equality is the wrong thing to optimize for. Instead, we should optimize for progress and productivity that increases the overall welfare of society fastest, even if some individuals do far better than others. Those individuals capable of contributing the most to meeting the needs and desires of the most individuals deserve the most resources to enable them. Those who have the least to contribute will benefit via surpluses created as a result of productivity gains.
(c) making everyone rich is beyond the possibility curve. Equality hampers any progress that requires risk. E.g. Steve Jobs. He took crazy insane risks. But only because there were maybe crazy insane rewards on the other side.
Deserve? Deserve? Seriously?
Do the top 25 hedge fund managers deserve more than all kindergarten teachers combine?
Does Bill Gates deserve $90 billion? But Albert Einstein deserves only $900K? Zuckerberg, inventor of Facebook, deserves $45 billion, but the Tim-Berners Lee, the inventor of the web, deserves some tiny faction of that?
The 80 richest billionaires deserves as much as the bottom 50% of the Earth's population?
A scrawny computer programmer makes ten times the farmhand. But suddenly the two are stranded on an island, where muscle and hunting skills are more important than computer skills. Does the farmhand suddenly become a more deserving person, deserving ten times the food?
Survivor bias.
For the sake of proper comparison it should be all hedge fund managers combined vs all kindergarten teachers combined - a good portion of hedge fund managers never see any money (or, better yet, are main contributors to their fund and then promptly go into negative). Not saying that averages work out better for teachers, but a random teacher likely has a larger paycheck than a random fund manager.
Next up - does the guy who bought a $1 PowerBall ticket deserve 100% of the jackpot when there are honest hard-working people who bought five times as many tickets?
And to your "next up": No. Luck != deserve. That is essentially my point, and the implicit point of the OP. A primitive society leaves all to luck. An advanced, mature, fair society does its best to eliminate chance (e.g. insurance, the root meaning of which is precisely that). The lottery is a patently backward thing (the opposite of insurance) and I'm appalled that our state governments perpetrate and profit from such harmful and exploitative things.
These are hard questions to answer. Lot of people can become a kindergarten teacher but not a lot of people can become a successful hedge fund manager. So in the end the free market decides who deserves more.
If you are looking to invest your money with a hedge fund manager you want to go with the guy who has a great historical record but the hedge fund manager knows that too so he will charge a premium but you are ready to pay that premium because of his good historical record.
So the free market decides that average teachers are good enough and they will do the job with average salary. But in the world of hedge funds, average managers are not good enough, you want the best and you are ready to pay a premium to get the best manager.
Given that there is a massive teacher shortage[1][2][3], and there is no shortage of aspiring hedge fund managers, can you come up with a model that reflects more accurately reality?
[1]: https://www.washingtonpost.com/local/education/america-has-a...
[2]:http://www.huffingtonpost.com/news/teacher-shortage/
[3]:https://edsource.org/2016/states-teacher-shortage-hitting-al...
First of all the shortage is only some specific sectors like STEM or schools in poor areas.[1]
So the question you should ask is why is there a shortage in some areas, it's because teaches are not being paid well so the supply is dwindling. This is exactly how the free market works.
The next question you should ask is why did salaries for teachers kept going down.
There might not be a shortage aspiring hedge fund managers but there is shortage of fund managers which good historical track records so the good ones get lot of investment money.
[1]: https://www.brookings.edu/wp-content/uploads/2017/04/es_2017...
What is free about the job market for educators? The political process which determines their compensation? The bureaucratic machine which continues to raise the bar (credentials)? The procurement process which diverts tax dollars into crony coffers? The mandatory unpaid overtime?
What, in your opinion, could teachers, or any individual teacher, do to earn a higher salary?
Teachers can work in private schools or teach online or give private tutoring.
But in this example you're comparing high risk -> high reward vs low risk -> low reward and introducing survivor bias to boot. At some point the representatives of high risk -> high reward (a) decided that they want to pursue such careers and (b) managed to convince a bunch of moneyed individuals and institutions to entrust the money to them. The representatives of the low risk -> low reward group decided against such path.
Basically, to turn the question around, if things are so rainbows and sunshine in the hedge fund land, why don't more individuals make a career move from kindergarten teacher to a hedge fund manager? From your example seems like no-brainer decision, so you'd expect rational individuals to be jumping the ship en masse.
> An advanced, mature, fair society does its best to eliminate chance
Does it? So every restaurant, home-based artisan and photo sharing app entrepreneur has an implicit guarantee of success and nobody ever competes with or disrupts anybody else's business?
As measured by who, and how? This is standard economic orthodoxy but the fact that many important metrics like life expectancy are running counter to what you'd expect from looking at GDP etc. suggests that we have hit a local maximum and need to revise our models and methods.
This is not the best of all possible worlds, and reiterating the first principles that you believe in will not make it so, any more than praying for justice while carrying on in exactly the same way in all other respects.
It did not matter how much the amount was---fixed or random, the outcome was always the same---a small number of actors would end up with the majority of money.
But hey, the outline of what I did is there---try your own hand at simulating this.
[1] I thought of maybe food, materials and energy (ala M.U.L.E.) but I had no way to determine realistic price levels (or want levels for that matter).
But that doesn't mean we can't teak the dials to create better distributions. Being human means we can overcome certain natural processes. We can fly. We can live in inhospitable places. Why can't we do the same for natural economic processes?
I think instead of trying to make wealth equal, we should focus on making people's lives better.
Secondly, can it not be possible that both communism and capitalism are bad?
Thirdly, can't we make people's lives better without awarding 40% of the wealth to 1% of the people, and 22% to 0.1% (2012)?
Fourthly, it's not simply about money, because that could be easier to ignore, if it were true that everyone, including those on the bottom, were better off. But money is power. In other words, democracy is thoroughly undermined. All one has to do is see how much money is poured into politicians' coffers and by whom, and for what purpose. Or see that you can't become president without getting $1 billion dollars of "donations" for your campaign. Is it one person one vote or one dollar one vote?
Word.
Richard Wolff is asking the right question: How do we distribute the "surplus"?
http://www.democracyatwork.info
I'm chewing on his notions for worker self-directed enterprises. Having used democratic decision making processes with great results, I've been keen to learn what others are doing.
Another thing I never actually advocated anywhere ever.
You only need to be slightly better than your
competition, but if you are able to maintain
a slight edge today and tomorrow and the day
after that, then you can repeat the process of
winning by just a little bit over and over again.
Succeeding means securing advantage. Those who expect to succeed only by being "better" are doomed fools.
You don't really know what's going to be more successful in a given niche until it becomes obvious.
As you say, there's no reason it has to mean "Worked harder", "Was technically superior", "Practiced more", or any of the other things it would mean in a less arbitrary world.
You can often increase your odds of success with all of the above, but a 1% change - whatever that means in practice, and however you're supposed to measure it - is always going to be swamped by effects outside your control.
Further fitness is defined by inheritable traits. You can have a billion descendants with blue eyes you can't have a billion descendants who are all kings of England at the same time.
PS: A useful rule of thumb is a justification sounds like a value judgement something else is going on.
Betamax was "better" than VHS if you only compare 1 dimension such as "picture quality". However, if one also compares other dimensions such as:
+ recording time: VHS records 2-hours vs Betamax 1-hour
+ licensing fee: JVC less expensive than Sony royalties
... to combine pq+capacity+price into a composite score, VHS was "better".
"Better" connotes a value judgment. The author of the article takes the neutral concept of "accumulative advantage" and inappropriately ascribes moral value to it, corrupting the insight of the Pareto principle.
Where did you infer moral value in the author's words?
This way, it basically removes culpability and replaces malfeasance with a technical bug.
It's a very moralizing article.
Funny that you think the article pushes a "neutral position" when it repeats the word "better" over and over.
That is the sense the author used the word "better" in - to describe the initial cause that results in a power law distribution. He never praises people for accumulating wins and outsized rewards, he merely observes that it is the case. "Better" in this sense is not being used to describe classes of people, it's being used to describe small advantages.
If anything, the author is probably doing the opposite of your claim here, in that he would probably agree a lot of the reward is due to initial luck. If I observe that people who inherit wealth are more likely to accumulate more wealth, am I implicitly defending that phenomenon?
EDIT: For whoever is doing so - I don't mind if you downvote me, really. But several of my comments have just been downvoted once or so without any actual reply. If you disagree, you should consider engaging in a proper response. Letting my comments stand may as well be conceding the point, and if you actually have a persuasive counter it's certainly not going to help the discussion (or your stance) by keeping it to yourself.
One consequence of the system is that people born to wealthy family with a trust fund get money they did nothing to earn. They were simply born to a family with money. The people managing their fund will work to ensure the money keeps coming in or grows. The beneficiary can use that money to all kinds of advantages.
Receiving more and more of the pie isn't happening because the beneficiary is better. It's happening because the system is structured to move that money toward the beneficiary. We could also move it somewhere else (eg taxes), make beneficiary work for it (eg incentivize helpful investments), or some other tradeoff.
The difference between the two analyses is moralizing.
Which is a sickening and illegitimate argument.
It's a myth that Betamax had better picture quality than VHS. They were virtually identical on that metric. It seems that people confuse Betamax with Betacam, a professional format using the same size tape that was superior to VHS in picture quality.
VHS was a last resort, because the image was absolutely awful. Even fresh VHS recordings were lower quality than many of our older Betamax recordings. (Side note: We eventually had little choice but to digitally capture the whole stock, so if you were to go to my previous employer, which unfortunately you can't, you would be able to do a side-by-side comparison.)
This is stupid: Betamax was significantly more expense at virtually every level than VHS, not to mention its production was (overly?) restricted by Sony.
It gets worse: Betamax did win, just not in the consumer space. Professionals used (and continue to use to this day) Sony's "Beta" format because they could afford to, and it was technically superior (if more expensive).
For most things in life, there is no way to define "better", because life (and products) are multi-dimensional, "better" in same areas and "worse" in others. Thus, it's impossible to say that the "best" product won (or didn't win), Betamax/VHS included.
There is no rationale given for the 1% rule e.g. why not 10% or 0.1%? There is not statistics behind the 1% rule. Yes there are "the winner takes all" situations but the article neglects diversity and other negative feedback loops e.g. in fashion the winner may succeed only to be swept away by a counter-revolution trend.
About the author:
> I'm an author, photographer, and weightlifter. Most people know me because of my writing about habits and human potential. I've created this weird “job” for myself where I try to be an advocate for the world's best ideas.
When phenomena appear to obey a power law, the specific percentage increase does not need to particularly rigorous to illustrate the growth pattern. You could plot the two axes without numbers and it still basically makes sense. You're going to see a disproportionately weighted side and a long tail next to it.
That doesn't mean the author is necessarily correct in the overall observation here, or that you shouldn't add further rigor to the analysis; it just means that for the purposes of an article without peer review, "1%" is probably fine. Power laws are very often fuzzy when they're applied (or perhaps rather, "observed") in practice.
I think that I might write an article about this to justify current economic trends and hardships...
As that is an economics paper the author is naturally at pains to relate such outcomes back to real-world causes, so as not to get lost in a maze of abstraction. My personal take on this, as an amateur number theorist and geometer, is that real-world Pareto distributions are degenerate cases of ideal power laws whose specificity and distinctiveness are illusory. I am a neoplatonist so you might want to think of this as a suggestion to take a step back rather than to peer closer.
There is no argument in the article that this is good or desirable. Many things in nature are terrible and destructive. But doesn't it help if we understand them? What point are you trying to make?
I also believe your belief that society rewards those who justify elitism is very misguided. Virtue signalling through displays of altruistic self-sacrifice and support for the underdog rules the day. Playing that game is incredibly rewarding for social status.
> Imagine two plants growing side by side. Each day they will compete for sunlight and soil. If one plant can grow just a little bit faster than the other, then it can stretch taller, catch more sunlight, and soak up more rain. The next day, this additional energy allows the plant to grow even more. This pattern continues until the stronger plant crowds the other out and takes the lion’s share of sunlight, soil, and nutrients.
"Use habit to keep being slightly better!" -- but sometimes "slightly" is not easy to get by simply making it a habit. "Grow userbase 5% week over week", for example. It's easy to get 5 extra users when you have 100. But once you reach 1000, getting 50 probably not easy.
I've found that the article was very useful framework to think about optimizing things. Especially as the author describes how small tiny advantages appear to accumulate over time and amount to giant advantages that is meaningful. Ie. habits, no matter how small but are alightly better, snowballs into a large advantage over many iterations
It's even more counterintuitive than the 80/20 rule until you really understand the nature of power laws and unequal distributions.
[1]: https://www.elitemindset.com/the-pareto-cubed-principle/
It also suggest normalizing. I.e. If you can identify the 80% of the time where you're under utilized at work by one thing then use that time for something else.
Also, I think this gives insight into knowing when to cut a loss or decide whether something works or not.
my take away from the article, with some elaboration is the following:
a) through out our lives we have 'binary choices' and 'graduated choices. Where 'binary choices' basically a yes/no kind of things. While 'graduated choices' allow shades.
b) the more binary choices present in a given subject of application (eg economics of individual income), the more 80/20 or (50/1) rule hold
c) consistency in making 'right' binary choices, has huge benefits
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If you look at the wealthiest people in the US, they are people like the Koch brothers, who inherited their wealth, or the Walton heirs, who inherited their wealth, or the Mars children, who inherited their wealth, and so on.
You could also look at others. Bill Gates was born with a million dollar trust fund - his great-grandfather ran National City Bank, his mother was on United Way’s executive committee with the CEO of IBM, his father ran a law firm, he went to Lakeside high school (current annual fee: $33,000) which had teletypes and access to a GE mainframe in the late 1960s. Warren Buffett is also "self-made". His grandfather owned a chain of grocery stores, his father was a congressman, he went to UPenn and Columbia. Mark Zuckerberg's parents are professionals, he went to high school at Phillips Exeter (current tuition $36,000, more if boarding there).
The first group did absolutely nothing. They're not really being "rewarded" as the article says. They can just jet from Aspen to Monte Carlo their whole lives, expropriating surplus labor time from those of us who work and create wealth. You can watch the documentary "Born Rich" which was made by one of these people (it's sometimes on Youtube) and is about these people. The second group - 1%ers who made it into the 0.1%, I suppose transitioned from one class to another, and had a hand in codifying how a large number of people worked. Even doing some of the initial stuff themselves - porting BASIC to yet another platform, selling a CPM ripoff to mom's friend on United Way's board, starting yet another social network (and being sued for stealing it), beating the S&P 500 year after year.
This is all helped by a massive mechanism of basically all of society tilted to let this class of what I consider parasites to expropriate the surplus labor time of those of us who work. It's a social relationship - workers work and create wealth, and heirs expropriate our surplus labor time and the wealth we create during it. And use it as a cudgel against us not just in the world of business, and not just in the governments they created and maintained, and the schools those governments run, or the media they created and maintain and to a large extent monopolize, but also other social organizations as well like churches. Through the corporate owned news I learn Trump, an heir and businessman now running the government, this week signed a document which would allow churches to be more involved in selecting who is and is not in government. All goes into each other - you organize the wretched of the earth at the bottom of society to believe in some superstitious fantasies in order to select certain leaders who will be even more vehemently against their economic interests. One part of society flows into another, but it all flows back to the center, which is what we all wake up and do most days - work and production, and the relationship between the worker and those who are parasites on worker's labors and who have the upper hand at the moment.
Of course, several centuries ago it was the royal families who had the upper hand on the poor and the workers and the merchants, so these things seem to shift around as history marches on.
This makes me wonder whether there is a good general exit strategy for those situations. That is, a method to reorientate as quickly, painlessly and promising as possible. I worry that's a too abstract way to think about it, though.
There's always a risk of never going far enough to actually become the best there is in something. That's an undeniable fact.
But it gives you (1) a priceless experience, and (2) teaches you to prioritize.
I am definitely not the wisest man -- quite the contrary, I am pretty flawed -- but I learned that holding on too much is much worse than letting go and maybe trying again one day.
The past is a very poor decider of whether you should persist. There are a lot more factors which are much more important.
It seems like they appear almost everywhere. I have yet to find a satisfactory explanation of why!
> one of his lasting legacies
> was turning economics into a
> science rooted in hard numbers
> and facts
Rate of return on capital is higher than wage growth.
So the wealthy get richer at a faster rate than the average worker. This amplifies inequality.
http://www.newyorker.com/news/john-cassidy/pikettys-inequali...
Traditionally it's been easy to expand into a software market if you can come up with a superior product, but when you are playing with AI and competing on having a superior dataset, size and existing advantage starts to matter a lot more.
Pareto is valid, but getting from Pareto to "You only have to be a little bit better to win everything" is first-order nonsense.
Still - the author has books to sell. So there's that.
So maybe we should let that old meme "if it's not done in white lab coats, it's not a science" die.
But hey, let's play a game: You tell me what's a necessary condition for something being a science and I'll tell you an instance where that condition as broken or a "non-science" that fulfills that condition.
Go!
Science as a process of study can be effectively applied to phenomena that are not as easy to rigorously measure as physics and chemistry.
I don't really understand where this view comes from. Is it a lack of exposure? There is a rich world of academic study in economics that is deeply complex, mathematical and even empirical, insofar as you can reasonably achieve in a domain that studies human behavior. There's more to it than the Pareto principle and "A Market for Lemons."
Studying the individual or aggregate behavior of human beings is inherently more difficult than inanimate objects. That doesn't mean you can't be rigorous with it.
Criticizing economics is entirely valid. Pissing on it is not.