Are super-rich people just better at making money?

https://pudding.cool/2022/12/yard-sale/

by dncosta • 4 years ago

344 563 4 years ago

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.

bmitc20• 4 years ago

I don't think they're better at anything. The power of money to make money and to buy opportunity, time, and mitigate risk is extreme. Being able to take risks and fall back on your family's wealth can enable huge gains when taking high risk chances. See basically every "entrepreneur" like Gates, Bezos, Musk, Zuckerberg, etc.

erie• 4 years ago

Rich people are in the right sectors empowered by globalisation and tech, those are health care, food and education industries. https://www.youtube.com/watch?v=vsmwnUPQ3Q8 Bill Gates is working on his version of circular economy, his charities feed into his investments: "The global pharmaceuticals market size is projected to grow from $1585.05 billion in 2022 to $2401.22 billion by 2029, at a CAGR of 6.1% in forecast period."

durnygbur• 4 years ago

circular economy

haha that's my first thought when I hear about "charities" by the billionaires in the Anglosphere world... sounds like some tax dodging loophole with huge marketing budget and a website. Why don't they just pay their taxes?

bmitc20• 4 years ago

To solve all this, it'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&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&D and then act abused when asked to help give back.

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.

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.

system2• 4 years ago

I know all of this but reading it again made me angry.

sgjohnson6• 4 years ago

To solve all this, it's pretty simple, and the U.S. actually used to do it: heavily tax the super rich.

That never happened. https://mises.org/library/good-ol-days-when-tax-rates-were-9...

bmitc20• 4 years ago

What is "that" that you're referring to? Tax rates have absolutely fallen. If you're referring the article's claim that the rich pay much more taxes in terms of dollar amount, that doesn't necessarily mean anything because the rich are wealthier and more concentrated than every before.

For example:

According to investment bank Credit Suisse, the fraction of global household wealth held by the richest 1 percent of the world's population increased from 42.5 to 47.2 percent between the financial crisis of 2008 and 2018. To put it another way, as of 2010, 388 individuals possessed as much household wealth as the lower half of the world's population combined—about 3.5 billion people; today Oxfam estimates that number as 26.

https://www.scientificamerican.com/article/is-inequality-ine...

lozenge2• 4 years ago

Your source doesn't address the amount of tax collected from the ultra wealthy in relative proportion to their wealth. It only addresses the amount as a percentage of the federal budget.

netsharc• 4 years ago

Ha, Austrian school of economics... I'm sure they have a neutral point of view.. /s

https://en.wikipedia.org/wiki/Austrian_School#Criticism

hackerman123469• 4 years ago

But tell me, how are you going to tax the super rich? It's incredibly difficult to tax someone who's actually poor on paper. Most super rich people actually don't seem to have much wealth officially declared, all of their wealth is sort of like "pseudo" in that it's all tied up in assets, and sometimes assets that aren't directly owned by them but their companies etc. and they have a lot of shortcuts for tax breaks on the stuff that can be taxed. With the current system in place then it's impossible to actually tax the rich.

shafyy4• 4 years ago

It's incredibly difficult to tax someone who's actually poor on paper

You think this because the super rich want you to think this. Actually, it's not hard and there are some good ideas floating around (e.g. more inheritance tax, don't let them get loans without taxes againt their illiquid wealth). Does it require a change of laws? Yes, but that's the whole point of democracy.

sgjohnson6• 4 years ago

More importantly, the super rich get to choose when, how, how much, and where, and from where they are paid.

And even more importantly, they all live on low interest ELOCs.

There's also no reasonable way of fixing this.

bmitc20• 4 years ago

It isn't difficult at all. This is an oft repeated excuse. The rich use their wealth as collateral to purchase things, like homes, companies, investments, etc. and transfer wealth to inheritors with basically no tax. So stop worrying about trying to figure out how to tax unrealized wealth and start taxing the things that unrealized wealth helps secure and purchases. This is one way to force realization of that wealth and thus tax it as well and get it back into circulation.

Right now, the rich are extremely incentivized to remain "poor on paper", so we should remove those incentives.

sigg3• 4 years ago

Of course you can track down de facto ownership and streams of income regardless of de jure separation. This is a question of political will, not economical (im)possibilities.

Whenever you try making rich people responsible, they move abroad. In Norway, the super rich are becoming Swiss citizens after a recent change in taxation. Unless Switzerland takes social responsibility, they're getting away with it. But if Switzerland does the right thing, the rich will find another safe haven.

However, this is a short term issue. The long term changes require a historical change in culture and policy. Otherwise we're still very much catering to the will of old money and power structures that resembles autocracy.

(I'm just an armchair socialist and no expert by any measure, ymmv.)

pigsty• 4 years ago

It’s a problem of choosing not to enforce it.

Some rich person says “teehee, I actually have no money! It’s all in (some country)!” and the US gov says “oops! Guess you really are poor!”

They take a letter of the law instead of a spirit of the law approach with taxes. If they start seizing mansions because clearly they have no money and the only way they could afford it is through ill-gotten means, people will start paying. Police already take cash from the wallets of random people because they assume it’s illegal—meanwhile the IRS knows full well where your money comes from but they pretend to believe the tricks of the mega rich.

Plus the IRS literally have access to banks around the world. You’re required to give them proof of foreign bank accounts or face imprisonment and other countries comply with IRS requests. They can literally seize wealth and know it’s yours. They choose not to.

jlangenauer• 4 years ago

You tax capital gains, interest income, dividends, royalties etc etc etc exactly the same as income from labor is taxed.

WalterBright21• 4 years ago

The tax code does not require anyone to declare their assets. It's the income that gets declared.

shafyy4• 4 years ago

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 is known since at least Marx, and still it doesn't change. This makes me very sad.

blfr• 4 years ago

The US is only very loosely constrained by its tax base. It does not lack funds.

It has also been spending much more on education over the past decades[1]. With very little to show for it.

[1] https://nces.ed.gov/programs/digest/d19/tables/dt19_236.55.a...

foldr5• 4 years ago

You’d expect education costs to be rising, though, as people are expected to have a higher level of education before entering the workforce than they were previously, and because career changes and reskilling are far more common than previously. It’s a bit like healthcare. You can be spending far more than you were when there was a younger population and fewer sophisticated and expensive treatments, and yet still not be spending enough.

bmitc20• 4 years ago

I'm not for sure I agree, but that's a separate issue than de-concentrating wealth. What to do with tax funds, how to appropriately distribute them, etc. is another discussion. Just because those problems exist, we should allow more and more wealth to be concentrated?

silisili• 4 years ago

Because spending money on education doesn't equate to better outcomes. It creates more bureaucracy, bigger councils, etc.

Teacher pay is still abysmal, especially considering the fact they are expected to act as guardians and even security these days. And you'll never get better outcomes if you can't attract smart people to actually teach, no matter how much you pay the superintendent.

US public education should be called what it is, a government sponsored day care.

selfmodruntime2• 4 years ago

My partner is a teacher, and the money certainly does not reach educators or kids in need. It mostly gets stuck at the administrative level or is spent for expensive football teams. Hell, there is still a national debate about kids going into debt to pay for lunch

derelicta• 4 years ago

I think this time we should go above and beyond regular heavy taxation. We should seek to extend republican norms within the corporate sphere and downright prohibit rent-seeking.

A country whose inhabitants have no say in its internal politics is called a tyranny. It's more than time to see the current workplace the same way.

smilekzs3• 4 years ago

One thing I've noticed consistently, is when politicians talk about "taxing the wealthy", they almost always follow that with "earning more than $xxxk a year". This is conflating wealth with income.

Being within this tax bracket myself, I do not deny that I am biased, but I do hope this bullshit gets called out hard whenever someone brings up yet another underhanded measure to milk us (typical SFBay SWE) above and beyond the ~40% levels we're already facing...

nemo44x4• 4 years ago

Is this a new form of NIMBY taxation? “Tax the rich but not rich people like me!”?

bawolff6• 4 years ago

As a practical matter, it is very difficult to tax wealth (and even harder to do it fairly.) I don't think the issue is lack of will but lack of plan that actually works in the face of assets with unclear value and/or difficult to liquidate.

And this doesn't just affect the ultra rich but people like SWE too. How much is the stock you have in the non-public company you work at really worth? SWE are probably one of the groups most likely to be "paper millionaires" and hence screwed by such a system.

foldr5• 4 years ago

Only the super-rich in America feel wealthy. Everyone else is trapped in an unwinnable game of keeping up with the Jonses. I can almost guarantee that if you actually listed the concrete reasons that you don’t think of yourself as wealthy, they would seem ridiculous to the majority of middle class Americans. (Although obviously I don’t know your personal circumstances. I am thinking of the general case of a seniorish software engineer working for a big tech company in SF.)

seunosewa• 4 years ago

They want as many voters as possible to feel that they won't be among those who will be taxed. You're in the minority.

dismantlethesun2• 4 years ago

If you are wealthy and refuse to earn an income, then your savings will eventually deplete and you’ll become bankrupt.

Additionally they wealth already taxed in a previous era, and is currently taxed in this era any time they spend it via sales tax.

If of course you are spending all your money on personal groceries as a billionaire, then I’m 100% fine with not taxing you.

dr_dshiv2• 4 years ago

Come to the Netherlands! 52% kicks in early and plus there is the 2% worldwide wealth tax on all non-real estate investments.

Is it worth it, just to live in a shockingly civilized society under a highly functional government?

nootropicat• 4 years ago

That's because the actual point of progressive taxation is to prevent class mobility.

LatteLazy2• 4 years ago

Well said.

willcipriano• 4 years ago

The politicians make money via insider trading, so of course they propose a income tax as opposed to a capital gains tax to "tax the rich". Many of them have been in power for 40+ years, if they were going to tax themselves it would've already been done.

thrwawy74• 4 years ago

I could see tax brackets working by how your income compares to the area you live in.

"If your income is 30% above the average income for this area or the national average (whichever is lower), that >30% is taxed at this rate..."

So then you can't have rich folks disappearing to less-taxed areas. It could make rich people communities where they all stick together.

looking forward to the future where currency is time (the movie In Time), and we can tax rich people to death.

jermaustin1• 4 years ago

For the majority of the time there has been a Federal Income Tax, there have been top brackets in the 70% range. This was a burden begrudgingly borne by the wealthy for many generations. It funded the US leaving an agrarian lifestyle and becoming a superpower.

Did a 70% top-tax bracket force any of the uber-high earners to stop earning money because they didn't want to give 70% to Uncle Sam? No, the super rich will always want more money/property/dividends/etc no matter how burdensome the tax bracket they fall in might be.

throw__away7391• 4 years ago

Exactly, this is going on every single day. They run stock reels of Bezos and mega yachts and private jets and then introduce their plan to raise taxes on people who have enough income to renting a 1 bedroom apartment without roommates and have a reasonable chance at saving up enough to buy a home someday.

mrguyorama6• 4 years ago

FYI, if you make several hundred thousand dollars a year, because you are a SFBay SWE, you are SIGNIFICANTLY different from an average american, and you should realize that. You ARE the wealthy that would and possibly should get taxed. It's not poor people's fault California refuses to do anything about having enough housing. It's not poor people's fault that google and facebook require you to live in california for no reason. Making hundreds of thousands of dollars in salary per year is a very privileged position.

Don't get mad at average americans trying to make the world a better and more fair place, get mad at google and facebook that make several million dollars off the code that you write and kick back a pittance of a salary, and coordinate with each other to keep your compensation low. Even at $400k a year, you are literally being underpaid.

bamboozled2• 4 years ago

"To solve all this, it's pretty simple,"

I feel if it was simple it would be fixed?

Moissanite• 4 years ago

Solving problems requires both the way and the will - those two things are not co-incident in many politicians.

chousuke• 4 years ago

Things can be simple to fix but actually getting people to implement the fix won't be there are incentives against it.

They are two different problems.

bmitc20• 4 years ago

It's because of who is in control, who has also brainwashed the poor into "someday this could be you living this lifestyle".

m0llusk• 4 years ago

The problem is that at the other end there is also dysfunction. With high taxes and regulations keeping companies and profits in line the result is also a combination of structural inflation and stagnation resulting from the high cost of almost any kind of investment or operations. This is what triggered the fundamental changes which occurred from the late 70s through the 80s with Thatcher and Reagan.

It might be helpful if we could construct metrics for social function that more clearly showed when we approach extremes that interfere with business or social functions.

danaris5• 4 years ago

Something can be very simple, and still be very hard to achieve because of resistance to it.

nemo44x4• 4 years ago

The problem with this live of thinking is that in reality most taxes are paid by wealthy people. The majority of people actually pay 0 taxes and in fact receive credits above their burden of 0.

Whine there’s certainly room to address fair taxation rates we should seriously consider how we spend tax revenues today. A 1.5 trillion omnibus is being rushed through Congress that’s full of pork and special interests. We just sent however many billions to a country to fight a war that has nothing to do with us.

So we spend all this money and of course it’s not enough. People say “more! Tax the rich!” Without considering the reality.

bmitc20• 4 years ago

That's not a problem at all. The concern is not the absolute dollars paid. The concern are the percentages and the concentration of wealth. That the rich pay a lot of tax is basically immaterial except that it points out just how skewed the wealth distribution is.

The "rich pay the majority of taxes" is an excuse.

WalterBright21• 4 years ago

The top 1% pay 40% of the federal tax revenue. The top 5% pay 60%.

California has the highest income tax at 13.3%, the highest federal tax rate is 37%.

That makes the top income tax rate 50%.

underdeserver• 4 years ago

Top 1% of salary earners. The CEOs, highly paid doctors, engineers. The real capitalists - those who hold the assets and pay for their yachts with stock-backed loans - they don't pay 40% of the federal tax revenue. Their salary is $1/year.

bmitc20• 4 years ago

I have already covered this elsewhere, but that's an excuse and actually only points to how concentrated the wealth is. Too bad they pay more money than others. Tax them more.

danny_codes4• 4 years ago

Before Kennedy it was 91%.

Imo we are well bellow the Laffer curve.

naasking14• 4 years ago

That makes the top income tax rate 50%.

While interesting data points, I'm not seeing an argument that they are paying enough, which seems to be your implication. Maybe it should be 90%. Maybe it should be even more.

Valakas_3• 4 years ago

Billionaires should not exist. When one gets to a certain amount of wealth, TBD, there they should get a golden plate saying "Congratulations, you won capitalism" and from them on, tax rate is 100%.

jmeister4• 4 years ago

This focus on super-rich individuals is totally misguided. What's important is the economic system. Rich individuals are simply a nauseating side-effect of capitalism. Nobody really likes it, but there simply isn't anything better. The burden of proof is on the complainers. Even Marxist-sympathetic Peter Singer gets it.

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.

http://archive.today/2021.04.25-160837/https://www.newyorker...

bmitc20• 4 years ago

I don't get the productivity argument. What productivity is enabled by billionaires or even individuals? Noam Chomsky has covered this, but most corporations benefit extensively from decades of government funded research and development. The socialist driven productivity is there, it's just that we slap capitalism on it at the end and think it was that that got us here.

naasking14• 4 years ago

This focus on super-rich individuals is totally misguided. What's important is the economic system. Rich individuals are simply a nauseating side-effect of capitalism. Nobody really likes it, but there simply isn't anything better. The burden of proof is on the complainers.

Serious critics aren't suggesting we do away with capitalism, they're suggesting that it has negative externalities that can be corrected by better taxation. The focus on billionaires is exactly right, because as the model in the article shows, taxation can suppress the extreme inequality that results.

selfmodruntime2• 4 years ago

The funny thing is, you don't even need to tax the rich all that much. The money is there. It's just spent on ludicrous stuff. The US annual defense budget is 800 billion dollars a year. Even when you argue that national defense and a well equipped military are necessary (which I believe them to be), I've seen military cost receipts. They're outrageous. You don't need 50 dollar rolls of toilet paper.

cpursley• 4 years ago

Dropping income tax and replacing it with a progressive sales tax should be at least explored. Wealthy don't file W2s but they do buy luxury items.

an-allen• 4 years ago

This all presupposes that the government is an efficient user of capital, when its pretty clear its not. Heavy taxes on the rich, means that capital investments that a rich person might finance, become government programmes and bureaucracies. Theres obviously a sweet spot here - but rich folks are good at creating capital and governments are notorious for wasting it.

Now in the US I probably don’t have to tell you where most of the money goes - hint military - so more rich folks money into the governments coffers - what industry do you think benefits the most from a policy like this?

danny_codes4• 4 years ago

Most of our money does not go to the military. Defense spending is about 700b per year, while the budget is over 4t.

The government doesn't need to handle capitol allocation. We can simply shift the tax burden upwards. Poorer people get reduced tax, rich people get more.

bmitc20• 4 years ago

This all presupposes that the government is an efficient user of capital, when its pretty clear its not.

It's not a presupposition. That's a separate discussion and should also be improved. We shouldn't say, "oh, we're bad at redistribution, so let's not".

spinchange2• 4 years ago

The Yard sale model in this post demonstrates that rich people are not necessarily better at allocating capital even if/as they accumulate and compound it faster.

The military is NOT where most spending goes - most spending goes to the entitlement programs: social security and Medicare.

Beldin2• 4 years ago

but rich folks are good at creating capital and governments are notorious for wasting it.

There is more than a little nuance here:

- governments are notorious for being called out on supposed inefficiencies.

Too often, it turns out that there were very good reasons for those inefficiencies, but the criticasters forgot the lesson.

- "rich folks are good..."

I wouldn't know. Superrich folks are good at manipulating the system and extracting wealth from others, that I can believe. We see that happen often enough - the superrich lose money if they were to pick up a 100 dollar bill (they make more money in that time if they work), while their employees have to pee in water bottles or are exploited in other ways.

I strongly doubt that the superrich are better than governments at creating capital for anyone else but themselves in an ethical, human-respecting manner.

Tiktaalik4• 4 years ago

Rich folks are only so seemingly "efficient" and good at creating capital because they decline to do what the government does.

The ultra wealthy property developer only builds what is profitable, and so slices off to serve only the most profitable part of the market to serve, and accordingly only builds luxury condos.

Meanwhile the government is obliged to serve everyone, the disabled, the poor, etc, and so with its housing whatever profits are gained by its market priced rents to the middle class are leveraged toward sustaining the unprofitable housing it is obliged to create, and the whole enterprise isn't profitable and needs outside subsidy to continue. We disparage this as "inefficient" government yada yada.

These two different groups aren't working on the same problems.

janalsncm3• 4 years ago

Adding on to this, we absolutely know how to tax assets. We do it all the time: property (i.e. house) taxes. The unfortunate thing for middle class home owners is that houses are a type of wealth that is taxed just for having it whereas art, corporate shares, bonds, and trust funds are not.

verisimi• 4 years ago

As if the wealthy have never thought of ways to hide their money... The best you'll do is tax those who are actually turning up to get a salary. Ie you will tax people who arguably might be producing something, as opposed to the inter-generational, rent-seeking families that own so much of our world.

If you ask me, and you accept overt governmental control of everything, the best thing to do would be a system of openess about ownership, so that ownership of everything can be seen by everyone - with no murky legal instruments.

If you have the information about who owns what - and everything is owned by people, individuals, even if they hide behind legal and corporate instruments - you can then consider addressing what would be an equitable may to proceed.

My guess would be that something ludicrously minor like a 10% wealth tax on the top 0.01% of wealth owners, would cover us indefinitely.

neilwilson2• 4 years ago

Or alternatively realise that there isn't a fixed amount of money and therefore if 'rich people' want to count their coins let them do so.

(i) it solves the capital accumulation problem (ii) you can accommodate the hoarding by guaranteeing people a job at the living wage, which then injects the right amount of new money, both temporally and spatially, to offset the hoarding.

Tax has nothing to do with raising money. Tax is about reducing the capacity of the private sector to hire people so the public sector can hire them instead. If there is unemployment then the public sector hasn't hired enough people or taxes are too high/ineffective.

It's never about money. It's always about stuff.

Here's how it works[1]

[1] https://new-wayland.com/blog/how-the-job-guarantee-fixes-mai...

TheOtherHobbes3• 4 years ago

There isn't a fixed amount of money. And taxes are only incidentally about public sector hiring.

There is (more or less) a fixed amount of power.

Taxes doesn't raise money, but they do redistribute and decentralise power, making it harder for the very rich to dominate economic and social strategy for their own ends.

543g43g435• 4 years ago

Ah, the mythical "super-rich" who could fund all of our solutions, if only we could prise their money out of their clutching hands!

It's funny how they always exist, even in countries like the UK and France which in reality have taxed them out of existence, and payscales are absurdly compressed compared to the US.

Careful what you wish for, you are someone else's "super rich".

ChuckNorris893• 4 years ago

the UK and France which in reality have taxed them out of existence

You're making it sound like billionaires are an endangered species there. :) Last time I checked there's more than enough billionaires living in the UK and France[1].

[1] https://en.wikipedia.org/wiki/Bernard_Arnault

reallydontask• 4 years ago

While it's true that wealth is relative, this is so disingenuous that I can only presume that this comment is not made in good faith.

FWIW, I think multinational corporations that engage in all manner of legal tax avoidance are probably more of a problem than individual billionaires.

XiphiasX• 4 years ago

As a reaction to this, the super-rich will just implement offshore strategies to move their operations to tax-friendly jurisdictions.

imgabe10• 4 years ago

There is no “this” to solve because this is a wildly inaccurate simulation and not the real economy.

1letterunixname• 4 years ago

Fair taxation doesn't work with regulatory capture. The US is a gross-unequal mafia colonial power. If it wasn't, campaign finance reform not only would've passed decades ago, it wouldn't be necessary. Instead, it's easy to be super rich and pay almost no taxes like Trump or Buffett.

jmyeet2• 4 years ago

The idea of the “middle class” is propaganda. The whole point of this as well as any number of wedge social issues is to sow division and direct your anger at marginalized groups instead of the wealthy and powerful.

There are only two groups when it comes to economic status: labor and the capital-owning class. Labor is anyone who derives their income from their labor and goes all the way from the janitor to doctors and professional athletes.

Th idea of the middle class was invented to sow division with the “lower classes”. I mean look at your comment. You assert the “middle class” is getting slammed with taxes. Some (not necessarily you) imply the lower classes are somehow getting a free ride or are lazy. This is the propaganda.

We live in the wealthiest nation on earth. People without housing or food security is completely unnecessary. Charging people $1000/month for insulin, without which they would die, is only that way for corporate profits. Think about that.

int_19h8• 4 years ago

You're right, but this misdirection goes both ways. Logically, it would make more sence for the "lower" and the "middle" class to present a unified political front to tax the capital-owning class. But with the division in place, politicians backed by capital can sell a tax plan that is mostly, in fact, about raising taxes on the middle class but not the capital (most proposals that focus on personal income tax rates are in this category) to the "lower" class.

Valakas_3• 4 years ago

I don't think it was *invented* to sow division, but I agree with you that it can definitely be used for it.

There's different ways to categorize things - lower-class, middle-class and upper-class is a sort of intuitive way which throughout history has made some sense, somewhat, with different names. However, I get that maybe it's not the most useful currently, because there's such a ridiculous divide between upper-class (rich) and the other two, that we, belonging to the bottom 2, should band together to bring change favorable to us.

wtcactus• 4 years ago

Your assumption is that the state will apply that money optimally (or at least more optimally than the super rich - also, notice you didn’t define what super rich are).

Looking at historical and present data, I can be absolutely sure that the state will mismanage that money in almost every country.

I’m Portuguese, my government is collecting more ~ 25% taxes than it collected 6 years ago when the current ruling party got into power. Almost everyone (left and right) agrees that public services and administration are much worst. So, it begs the question: why giving the government even more money, will solve anything?

sega_sai• 4 years ago

To be honest I think this is strawman argument. I think it is absolutely true that the government will mismanage some of that money. The question is whether that money used with not 100% efficiency is better than a billionaire who may spend that money on anything. I certainly agree there are rich people who donate their money effectively but even then they decide what to spend the money on. So in my opinion some government mismanagement is not the reason to have some redistribution, but rather a reason to ensure that governments are properly accountable etc. And even if that is a government spending it can be still tendered to private companies depending on what's being done.

pixelfarmer4• 4 years ago

That implies that privately owned organizations manage money well, which is not the case either. The larger an organization is, the more inefficiencies it accumulates. Plus, don't forget that states usually provide a lot of subsidies to companies and also pay businesses/consultants to do some of their work.

Valakas_3• 4 years ago

If the state doesn't apply the money optimally, i.e. it's not doing its job, then that's the problem that needs to be fixed.

joemazerino• 4 years ago

Tax the rich and they leave.

OP has made a fundamental mistake in their logic. Poverty and earnings aren't based on "coin flips".

naasking14• 4 years ago

Tax the rich and they leave.

A common claim but never accompanied by actual evidence.

Eddy_Viscosity2• 4 years ago

Another contributor is dividends getting taxes lower than earned income (like from a job). Why would money you got from sitting on your ass doing nothing be taxed less than money you got by working a job?

LatteLazy2• 4 years ago

The problem with this plan is that modern economies need a lot of capital.

There are three places that capital can come from:

* the state, but we have voted year in and year out for tax cuts and spending rises, so the state is bankrupt. Not only is it not a source of capital, it is a major customer for it

* normal individuals saving and those small amounts being aggregated by banks etc. But rampant (and government supported) consumerism means most people are also consumers of capital not sources of it. Incidentally an example of the opposite of this is Germany where ordinary people save a lot more and don't have OTT mortgages and credit card debt. Mysteriously they have very few billionares...

* Billionaires. Which given the US (and UK where I live need their capital AND cannot get it elsewhere are able to charge a premium for it and cannot really be taxed etc without pain spreading all over the rest of the economy.

But if you try and tell people to spend less, save more, pay their taxes and accept less services in order to have a better, fairer, more equal, ultimately richer life they bulk...

newZWhoDis2• 4 years ago

If the government is not bound by a balanced budget amendment (can spend more than it takes in), and can print money whenever it wants, why do I pay taxes?

If the entire monetary system is fake, why do they need 40+% of my paycheck?

mint22• 4 years ago

Because without an income stream no one loans to the government, or at least not at current rates. Interest rates would explode.

Funnily enough Britain just demoed that for everyone. the prior pm tried to reduce taxes a ton and everything nearly went to hell in a hand basket.

So at least we can be confident the taxes are actually doing things.

therealdkz• 4 years ago

the problem is the taxeg go to funding military and healthcare. education is futher down the list.

likelyharrison_• 4 years ago

Heavy taxing is not the take away from the model the article discuses.

naasking14• 4 years ago

The model clearly shows that while heavy taxation does not fully eliminate unequal distribution, it does dramatically suppress the inequality. Completely eliminating inequality is not necessarily a goal.

willmadden• 4 years ago

The solution is to cut the size of government first. The inefficiency and outright grift happening in all federal agencies would make any entrepreneur’s head spin. Imagine if Congress had to answer to VCs for their spending. They would all be blackballed from the investor community overnight.

The “tax the rich more” line is a little naive. The world is a different place after the Rothschilds figured out how to shield their wealth from monarchies. It’s easier than ever to offshore wealth, remember the Panama papers that promptly disappeared from the news?

The “solution” of global governments is a cure that’s likely far worse than the disease.

It’s a complicated situation. A progressive VAT tax that is consistent across jurisdictions would be a good start. The tax code (at least in the US) needs to be thrown out and replaced. Monetary policy and taxation via inflation is also primitive and in dire need of reform.

hartator• 4 years ago

Or maybe just align income tax on capital gain taxes?

ethanbond2• 4 years ago

Eh, this would discourage investment. Investment is important.

2devnull• 4 years ago

There a thing called the Laffer Curve. It’s not as though politicians, whose job it is to spend money, and whom can easily get more popular votes by spending ever larger sums of money rather than budgeting in such a way that defers immediate gratification, have never thought of just taxing more (read history).

abnry• 4 years ago

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.

Oh yes, the "they don't know what's good for them" argument.

hardwaregeek• 4 years ago

I find it really frustrating that the discourse around taxing the super rich does not emphasize how absurdly rich the super rich are. Even if you are worth 500 million dollars, own a mansion, fancy cars, etc., you are still extremely poor compared to a billionaire. And even among billionaires, someone like Bill Gates is massively more wealthy. On /r/nba some people were remarking about how even among NBA owners, not exactly a poor group, Steve Ballmer is so absurdly rich that he could probably buy the entire NBA (obviously not with his liquid cash, although he did literally buy the Clippers in cash).

Like the phrase "tax the rich" makes people think of their neighbor George who as a nice house or even themselves if they make six figures. Nah man, tax the person who can literally buy the NBA and still be a billionaire.

listenallyall• 4 years ago

How does this "solve" anything? Do you actually think that if rich people start paying more, then that will result in a reduction in what poor/middle class people pay?

You are treating the government as if it had even the tiniest bit of fiscal discipline, as if it says, ok, we only have $x coming in, therefore we can only spend $x this year (or alternatively, we plan to spend x, therefore we're obliged to collect x in revenue, but no more than that.)

US government hasn't worked like this in decades. Our debt is out of control and growing exponentially. The government has the green light to spend spend spend without any caution whatsoever. Joe Biden has a 4000-page, $1.7 trillion spending bill working it's way through Congress right now that nobody has read. Do you think any politician actually cares how it's going to be paid for? Do you think there are enough ultra rich people in this country, that even if taxed at 99.9%, will dig us out from a 30+ trillion hole?

olvar_• 4 years ago

This model does not resemble a free economy at all. Not only it doesn't consider the wealth-creation aspect of a free economy, but it assumes people "wagers" their wealth. No society does this and is a terrible model of how an economy works. Most people earn their wages, if they have some money left they may save that, but long term saving is not comparable with a bet on a coin flip, if you think it is, then you should not save at all because you will go broke with probability one. Again, that is not what happens in our societies.

Jumping to the conclusion that "taxing the rich" could solve anything is completely wrong. You would just make things more expensive and add extra incentives to take jobs abroad. It doesn't matter that the model is too simplistic, the problem is that this model is too far from reality.

slowhand09• 4 years ago

So this redistribution... How will this ever be fair? If I work harder and smarter, save/invest instead of spending recklessly - how is it fair that the fruits of my effort are taken by the government (who incidentally created all the laws and loopholes we have now) to redistribute as THEY see fit (also known as Buying Votes). How do you redistribute my house (expensive due to location) to others living in less expensive places? How about my car (expensive and fast). It costs more, drinks more fuel, and looks nearly new. Never mind that I paid a gasguzzler tax on purchase, sales tax, smog inspection since new(another tax in disguise). It looks new. But I care for it, handwash it, polish it, seal it, personally - my labor. I roundtrip it 90miles a day, so it as 135k miles. But it looks new. MY LABOR. Nobody offered to wash/wax it for me and make some cash. Just like I shovel snow off my driveway. And rake leaves. Nobody wants to do that work. They just want their part of the redistribution.

Y'all worry about these millionaires and their money, yet here you are, hoping to learn the secrets of success from Y-Combi companies... and become wealthy yourselves.

fomine3• 4 years ago

Global fair taxation is what capitalism must solve in this century.

deterministic• 4 years ago

The solution is simple: Tax land not income.

bloodyplonker22• 4 years ago

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.

HPsquared3• 4 years ago

Indeed- the more money a person has, the more adventurous they can get in producing value. It's not rocket science! (most of the time)

quickthrower22• 4 years ago

Producing value? Sometimes. Sometimes extracting rent. Sometimes speculating.

If private equity buys a pharma company and cuts research, jacks up prices to extract money from insurance, that might be "clever" but it is not really benefitting anyone, quite the opposite.

Obviously a lot of capital is used to create more value, but it does so by using labour, so it is the creativity of the people working for that capital that is adding the value mostly, while the capital sits back and enjoys it's growth. This is the concept behind public traded companies.

SyzygistSix6• 4 years ago

the more money a person has, the more adventurous they can get in producing value.

I think it is more a case of the more access to capital they have. People who have demonstrated that they can create a lot of value usually get access to lots of capital, even if that capital is not theirs. It's pretty standard to not fund business ventures by one's self. An indication of a good business plan is buy-in from others.

gjulianm7• 4 years ago

No, but it's a decent approximation. Even in the case of "creating wealth", the person with more money usually gets a bigger share of the money simply because they had more money. This being Hacker News, I think we all are too close to the tech startup model, which is certainly far more equitable than others; but a lot of companies do not share fairly the value created between workers and owners.

abigail954• 4 years ago

If this was true about wealth creation, intergenerational wealth would eventually outcompete everything else, while it looks like the opposite is true.

Unless the people with money are the ones that made it themselves, they will keep buying bad watches like everyone else.

The what they invest it in, is the whole point. If you spend your life and wealth playing 20% of your bankroll with zero expected value - you should completely expect not to be wealthy, and if you do become wealthy it will be completely by chance, against the odds.

WalterBright21• 4 years ago

simply because they had more money

It's because they took on more risk. The bigger the risk, the bigger the payout. The safer the investment, the lower the payout.

do not share fairly the value created between workers and owners.

They do if one considers risk.

rizz0• 4 years ago

I believe his point is about coin flipping being a fundamental force in the market. That at the basis of a market, there’s a game of coin flips going on.

True, there may be technological innovations in factories, farms, and labs that grow the size of the pie as a whole. But probably those with most market power will have most of the access to those innovations.

And even if the value of technology would be fairly distributed, it does feel to me that the underlying game of coin flips rigs the whole system in favor of the eventual oligarch.

HPsquared3• 4 years ago

This yard-sale model isn't really how the economy works though, people don't continuously bet 20% of their net worth. It'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.

In a normal distribution, the shape of the distribution comes from a "random walk" left and right from a large number of steps of varying size.

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.

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's all multiplicative.

The lognormal distribution also has a fatter "right tail" than a Gaussian, which is what we see IRL.

naasking14• 4 years ago

I'm not sure it's intended to reflect the real economy. It's a useful model that shows how success and wealth inequality can arise for reasons of pure luck, and can have nothing to do with meritocracy. I'm not sure any of the points you raise really change the fundamental dynamics of what's shown here.

mettamage• 4 years ago

I love explorables! Simple model but good to see.

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

dhruval2• 4 years ago

This smells misleading / overly simplistic but I can’t quite quite put my finger on precisely why?

Some thoughts

- consensual trades are win win (you want a sandwich, I want $5 let’s trade! And we both win)

- 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).

strstr• 4 years ago

Zero-sum assumption and lack of returns on bets seem suspicious.

Betting is a bad deal for everyone in this model (even the rich person) since each coin flip is variance for no expected gain. Kelly betting implies you should bet nothing in this game.

lozenge2• 4 years ago

If you increase the payoff of the bet, it might prevent the poorest from becoming destitute, but the relative effect (where wealth concentrates in a few people) intuitively would still be present.

oreally• 4 years ago

The thesis was an investigation into whether the super-rich are better at making money, but they just took widely known distributions to tell a story enforcing that view without diving in as to why that's the case.

It's the classic case of using statistics as a method to divert blame onto something else. You learn nothing but a sense of despair from these kinds of analysis.

gjulianm7• 4 years ago

Some counterpoint thoughts:

- consensual trades are win win (you want a sandwich, I want $5 let’s trade! And we both win)

Not all trades are exactly "consensual". The sandwich seller can probably live without selling a sandwich, I can't live without food, so the seller has far more power to set the price. Existing power imbalances make trades less fair, specially with essential goods (and that includes jobs, which is why a lot of poor people end up massively underpaid).

- 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).

HPSquared said this in another comment [1] and I agree: what matters on this model is that every step is not additive but multiplicative, which is what leads to the inequality.

1: https://news.ycombinator.com/item?id=34091339

imgabe10• 4 years ago

In the real world, there is more than one sandwich seller and they compete with each other. When was the last time you non-consensually bought a sandwich?

Even homeless people on the street will sometimes refuse free food, so the idea that sandwich-sellers can set any arbitrary price they want or people will starve is just not something that happens in practice.

Indeed, sandwiches are abundant and affordable.

dhruval2• 4 years ago

1. Sure, I think there are degrees of consent

- people enthusiastically lining up to get the latest sneaker / iPhone.

- mildly enthusiastic grocery shopping.

- overpriced medical drugs due to a monopoly.

- taxation.

- outright theft at gunpoint

2. Insightful, thanks. I think one variable the model doesn’t account for is time (which is not multiplicative and scarce).

Money and power can be multiplicative so maybe most of us are playing the non-multiplicative game of spending our time to make money, while the rich are leveraged time to play multiplicative games where they spend money to make more money and happened to win a bunch of times.

wizofaus3• 4 years ago

The most obvious omission from that model is that in a real economy people voluntarily give money to others in exchange for goods and services. If everyone was equally good at producing useful goods and services then even if the yard-sale effect was occurring due to investment/wagering behaviour it's unlikely to lead to the extreme inequality the "pure" version does. It's also fairly obvious that in the real economy there's virtually nobody in the super-rich list that's got there purely by being lucky with investments. To what degree that's true only because we do have redistributive taxation systems I don't know.

ookdatnog• 4 years ago

The yard sale model doesn't attempt to model an actual economy. It's a thought experiment to counter causality bias.

Human minds tend to be biased towards causal explanations. So if we see huge wealth disparities, we're biased towards thinking that these disparities must exist for some deeper reason (often argued to be meritocracy). The model counters that thinking, by showing that, even in a very simple model with rules that seem fair to everyone, huge disparities can appear entirely at random.

It doesn't prove that the disparities we see in the real world are fully random. It invites us to question the assumption that they aren't.

crimsoneer• 4 years ago

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

samoit• 4 years ago

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

ZeroGravitas2• 4 years ago

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

johnfn• 4 years ago

That doesn't seem to follow, unless intelligence and ability to make money are mostly uncorrelated, which I think is a very strong claim that needs to be substantiated.

ZeroGravitas2• 4 years ago

Although such an unequal distribution may seem unfair, it might be justifiable if it turned out that the most successful people were indeed the most talented/competent. So what did the simulation find? On the one hand, talent wasn't irrelevant to success. In general, those with greater talent had a higher probability of increasing their success by exploiting the possibilities offered by luck. Also, the most successful agents were mostly at least average in talent. So talent mattered.
However, talent was definitely not sufficient because the most talented individuals were rarely the most successful. In general, mediocre-but-lucky people were much more successful than more-talented-but-unlucky individuals. The most successful agents tended to be those who were only slightly above average in talent but with a lot of luck in their lives.

https://blogs.scientificamerican.com/beautiful-minds/the-rol...

c222• 4 years ago

From my observations these traits may be inversely correlated.

oli56792• 4 years ago

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.

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.

wizofaus3• 4 years ago

I did think that but even if you extended the model to be one where money could be created via "successful" investments, I suspect much the same result would transpire - wealth would concentrate fairly rapidly if everyone kept re-investing %x of their wealth, such that a certain % of investments would result in wealth creation and others simple loss of funds.

oli56792• 4 years ago

Yes, this is a great extension idea.

If you make a model like this, for different parameters of speculation vs. value creation you can then test what the most socially beneficial rates of tax are.

More tax will lead to smaller but more equal economies and laissez-faire shouldn’t be optimal.

I would just want the model to acknowledge the non-speculation part, because many of the things I buy are from spectacularly rich companies, but that are genuinely useful to me.

Febra33• 4 years ago

Of course! But MY favourite billionaire is definitely not like the other billionaires..

Gatsky• 4 years ago

Well… except that many super rich had failed businesses, went bankrupt etc?

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.

WalterBright21• 4 years ago

People can and do learn from running failed businesses.

theginger• 4 years ago

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's money, or atleast all of what they are willing to risk.

ytNumbers• 4 years ago

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.

jmeister4• 4 years ago

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.

http://archive.today/2021.04.25-160837/https://www.newyorker...

danny_codes4• 4 years ago

I mean, we could just tax people more and redistribute to the bottom.

Basically create a society with some high income spread, say 100x. So a low salary would be like 40k as a floor, and 4milliom as a ceiling. Wealth can be capped via a similar scheme.

That way, people are highly incentived via capitolism just as they are now, but wealth is constrained.

Imo it's not that the mechanics are wrong, it's that the parameters are ill-tuned

jmeister4• 4 years ago

This is fair. Piketty thinks even 10x spread is sufficient to incentivize the entrepreneurs.

I’m suggesting that villainizing the rich is silly. Even in a perfectly meritocratic system according to OP, there’s going to be massive inequality.

DougBTX• 4 years ago

Ha, well that didn't go as expected!

https://imgur.com/a/uyXjs1N

I do appreciate an interactive example that doesn't have a canned result :-)

anovikov2• 4 years ago

What's wrong about it? Unless you also "defund the police", that is. If law enforcement is well-funded and works well - which isn't all that expensive or hard on a national scale - than what's the problem about extreme inequality?

wizofaus3• 4 years ago

If we were a species that evolved where extreme inequality made sense, we'd probably be fine with it. But we aren't - not even close. We have strong notions of fairness and acting in the best interests of society as a whole, that enable us to cooperate effectively etc. Extreme inequality eats away at what has made us successful as a species.

mschuster913• 4 years ago

If law enforcement is well-funded and works well - which isn't all that expensive or hard on a national scale - than what's the problem about extreme inequality?

Law enforcement in the US is insanely well funded. The NYPD, for example, has 5 billion dollars of budget for 50k employees and serves about 8.8 million citizens. In contrast, in the German state of Bavaria, a budget of 3.8 billion euros [1] supports 45.000 employees and 13 million people.

And yet, Bavaria has extremely low crime rates (the lowest in Germany with ~3700/100k people [2]), and the police stats could be even better if cops weren't forced to waste time on marijuana bullshit... while in New York, headlines referring to a lack of safety are more or less the norm [3].

The most interesting thing to me is: in absolute numbers, Bavaria had 508.000 crime reports filed in 2021 (cleaned up for cases of being in Germany unlawfully). New York reports 95.000 crimes in 2021... a sixth of the Bavarian absolute case count. What is the cause of this difference, and why is public perception of safety so immensely different?

[1] https://www.stmfh.bayern.de/haushalt/staatshaushalt_2019/hau... (page 5, table E, line "Polizei")

[2] https://www.tvmainfranken.de/auch-dank-wuerzburg-und-aschaff...

[3] https://www.bloomberg.com/graphics/2022-is-nyc-safe-crime-st...

[4] https://www.newsweek.com/new-york-city-most-dangerous-year-c...

anovikov2• 4 years ago

Something is wrong here, 500M for 45K people means ~850 euros per month per employee which is less than German minimum wage (1584 eur per month). Plain mistake.

$100K per year per employee in NYC sounds about right: around half are probably salaries plus payroll tax on them, resulting in just-over-poverty wage for low level employees and barely-middle-class for the higher ups; and the other half for supplies, building maintenance, etc.

SyzygistSix6• 4 years ago

The difference is probably less poor and desperately poor people.

abigail954• 4 years ago

There are so many wealth making opportunities that give more than literally zero expected value, and don't require 20% of your wealth.

You can become rich by following the rules of expected value and compound interest.

Backtest this against the population and tell me that people today wouldn'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 compound interest. This is so unpalatable for some people that they argue against sound decision making and reduce wealth creation to coin flips.

maigret• 4 years ago

While I’m not sure I’m following you 100%, luck takes a bigger part the higher the wealth. For example, existing billionaires have a way higher chance of having inherited a huge sum than the average population. If you take sound financial decisions you might get up to a million or a few, and above that it will be always more luck than skills. 100000x that is a huge lot of luck.

gabesullice6• 4 years ago

This is a dishonest piece. It ignores that it's based on a zero-sum game and the world isn't zero sum. The quoted economists know that very well.

I like that the coin flip game illustrates the concept of compounding interest, but it doesn't model wealth creation at all.

Most new ventures aren't I-win-you-lose, they're we-win-or-I-lose. Wealthy people really can take bigger bets more frequently like the article suggests, but it's not necessarily at the expense of everyone else.

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.

If you think this game through, you'll still end up with super wealthy outliers and bankruptcies, but the players in the game actually have some agency.

gyulai2• 4 years ago

That sounds interesting. Did you run the simulation?

gabesullice6• 4 years ago

I didn't. The interesting and difficult part would be that every agent could play a different strategy. It's fine to take $0.30 every round, you can play forever. Some people with a $1.00 would bet three times in a row, lose, and go bust.

Edit: if you run it, I'd love to see and play with it!

flawn2• 4 years ago

The only reason why it isn't zero sum is because we get access to more resources, and this leads de facto to more money in the pool (money <--> resources) right? If we assume the best case that these new resources are distributed equally and not depending on wealth, then the Yard Model still holds in place as we talk about relative percentages.

gabesullice6• 4 years ago

No, because new resources don't materialize like manna from heaven. Someone, somewhere needs to reorganize resources in a more efficient way or discover new ones. If you benefit "equally" from that change in dynamics to the person who actually catalyzed the change, then there would be less incentive to catalyze it in the first place.

It may happen from time to time because people are curious and benevolent. But, in general, if catalyzing that change has a cost, then the society depends on some people sacrificing their own good for everyone else's. In other words, the benefactor will have paid to catalyze it, but they'll only get an "equal" share of the gains to the people who sacrificed nothing.

I think you probably don't mean "equally" though. You probably mean "fairly". And it's probably true that "sacrificing" 20% of a billion dollars is a lot different than 20% of ten thousand dollars. But rates of return do tend to decrease at scale, maybe not enough?

Personally, I think taking from the catalyzers isn't optimal. It's also petty to worry that they benefitted "too much" from their actions. If we must tax, tax land and consumption. I haven't thought it through, but maybe a 100% estate tax, minus some reasonably capped life insurance for spouses and dependents, would reduce some of the feelings of unfairness that people experience.

HPsquared3• 4 years ago

Not even that, simple bartering increases value by distributing items away from the people who don't want them, to the people who do. Value is subjective.

If we each start with one red and one blue pen, but I prefer red pens and you prefer blue, we (voluntarily) trade the pens and each have two of our favourite colour. Net gain!

cloutchaser3• 4 years ago

It also ignores another big factor if psychology, humans are a lot more afraid of losing what they have than gaining anything.

So even in this stupid simulation, it just doesn’t work, as people get wealthier they actually risk less.

This whole article is Marxist academic bullshit, eaten up by Marxist upper class tech 20 year olds in this thread.

AnimalMuppet• 4 years ago

It also ignores another big factor if psychology, humans are a lot more afraid of losing what they have than gaining anything.

Rightly, I think. The marginal utility of the next dollar is higher when you have fewer dollars. (I think of it as roughly a 1/x curve, but I have no solid data for this.) This means that, if I bet 50% of my available money on a 50/50 chance, I will lose more utility with a loss than I will gain with a win.

But the more I have, the flatter the curve out where I am. So the richer I am, the more I can make that 50/50 bet, not just because I can take the loss better, but also because in terms of my personal utility, the rewards and losses are more evenly balanced.

Also note that if you have a 20% loss, it takes a 25% gain (on what you have left) to bring you back to even.

ARK_122• 4 years ago

Regardless of what complex strategy you apply in the real world, this still indicates that there's a bias at the core of a 50-50 fair bet in the long run, ability and IQ aside.

Besides the economy can very well have zero sum game elements to it

dontreact3• 4 years ago

Wealth isn’t zero sum but power over law (as defined by who has influence over the rules we live by) is.

When you have concentration of power due to concentration of wealth, the society will become unstable and undemocratic.

So even though wealth isn’t zero sum, wealth inequality is a problem that needs to be addressed for long term stability.

AuthorizedCust3• 4 years ago

Wealth isn’t zero sum but power over law…

Religious extremism isn’t coming mainly from the wealthy. It’s dominantly a lower-strata southern thing, with notable metastases all around the country, yet it plays strongly in the US system.

That some wealthy co-opt the extremists doesn’t change the above.

ksniwmidjd• 4 years ago

Zero sum game? Fractional reserve banking would like to have a word with you

naasking14• 4 years ago

This is a dishonest piece. [...] If you think this game through, you'll still end up with super wealthy outliers and bankruptcies, but the players in the game actually have some agency.

You basically admitted that the zero sum property has little bearing on the outcomes we're scrutinizing here, and so the argument is ultimately the same. I'm not sure how the piece is dishonest simply because it dispenses with an apparently irrelevant premise.

gabesullice6• 4 years ago

Honestly, this was a good observation that forced me to think more deeply about why the distinction matters.

I disagree that it's irrelevant. If the game is zero sum, the winners must succeed at the expense of everyone else. The game mechanics themselves produce unfair outcomes since nobody has any agency in their own outcome. Therefore, as this piece argues, the rules should be changed.

On the other hand, my example provides an alternative explanation for wealth inequality in which risk taking and inequality are inextricably linked. In my game, nobody loses because someone else won.

Far fewer people would find these game mechanics unfair, even though the final distribution of wealth is the same. It is not obvious that the rules should be changed.

I could adjust my game mechanics to make them look even more like the real world (as I see it): Every time someone takes a risk and wins, the non-bet reward should go up by a penny (e.g. from $0.30 to $0.31). In that situation, one would expect all the players to encourage risk taking because they know it benefits everyone whether they're taking risks or not. They might even conclude that the risk takers should have a chance at being wealthier than them because of these effects.

Using the zero-sum game leads the reader to a conclusion based on a false premise and I feel that was intellectually dishonest.

Note: one can still argue that the rules should be changed because wealth inequality itself is a problem, but that's not what this article is doing. It's arguing it based on the fictional rules.

dang• 4 years ago

Please make your substantive points without name-calling or swipes (like "dishonest"). They don't add to the informational comment and they tend to irritate, distract, and ultimately evoke worse from others.

This is in the site guidelines: https://news.ycombinator.com/newsguidelines.html.

gabesullice6• 4 years ago

You're right, that was poorly worded.

Gareth321• 4 years ago

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.

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't a bad thing. It means they'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's just that U.S. politicians lack the will.

Existentially, I believe that power corrupts. Billionaires are billionaires because they created a lot of value for society. Great. But once they'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.

_def• 4 years ago

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.

One could argue that most (if not all) of these factors still come down to being lucky

chii8• 4 years ago

it's too reductionist to attribute luck to all of those factors imho.

serverholic2• 4 years ago

Do billionaires really create enough value to warrant obscene wealth? Sure they deserve some wealth, but do they really deserve a billion dollars?

Are you forgetting the thousands of employees that are enabling them to become obscenely wealthy?

And I don’t buy the “deterrent effect” argument. IMO discouraging billionaires from acquiring more is a good thing and opens the door for other people to step up.

chii8• 4 years ago

do they really deserve a billion dollars?

yes, as long as they did not undertake an illegal action to obtain that wealth.

The employees that enabled the wealth creation is surely paid, and not coerced into the deal.

beautifulfreak• 4 years ago

Isn't this just the old concept of the "Gambler's Ruin"? https://en.wikipedia.org/wiki/Gambler%27s_ruin

mschuster913• 4 years ago

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 "boots theory" - 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.

The latter is the elephant in the room, IMO: once you hit 1 million dollars net worth, even a very conservative investment aka government bonds at 1% yields 10.000$ a year, at 5 million dollars it's 50.000$ a year, and at 10 million dollars, it'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're not actually losing money or spending over the yield of your investments, you literally cannot fail any more. You and your children won't ever experience being poor or homeless.

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're out of a million dollars but your other conservative investments will make that back in a year.

pixelfarmer4• 4 years ago

It is also fact that the more money you have, the more options to increase your wealth are actually offered to you. Means there is no "equal footing" to begin with. And when it comes to covering your basic human needs there is an upper limit to that, even if you go the luxury route.

hardware2win• 4 years ago

Haha this example is so obvious what happens in one MMORPG game I used to play

There is hazard game dice where you have 50% chance to win

But people who run those "casinos" figured many years ago that they will use e.g 90 95% payouts

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

s3000• 4 years ago

If resources would be distributed evenly, would society be better?

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.

There was 'Ask HN: How might HN build a social network together?'[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?

[1] https://news.ycombinator.com/item?id=33999296

kevin_nisbet• 4 years ago

Regardless of the rest, I like how this article shows the relationship of it's not the same bet to get back to where you started. I've observed very similar mistakes a number of times in how that % relationship works.

It really reminds me of Eve Online. It'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't be countered. Most worked like a +1/-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't get you back to where you started, the opposite increase is 100%. 20 - 50% = 10. 10 + 50% = 15, not 20.

Another one is for the property I live in, we'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%.

specialist• 4 years ago

wrt Eve Online, I've long thought that game economies could support public discourse. Just like how SimCity informs debates about land use.

Of course "real world" games, which don't nerf winner-takes-all, wouldn't be much fun to play for the non-winners.

sberens• 4 years ago

"To make 100 dollars into 110 dollars, this is work. To make 100 million into 110 million, this is inevitable."

donatj• 4 years ago

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.

What can the yard sale model tell us?

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.

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.

The author could have easily Googled the price for the exorbitant watch before they bought it. That’s entirely on them.

A_Venom_Roll• 4 years ago

Every time anyone creates something more valuable than the sum of its parts, value is added to the system.

I really like this angle, although the value of 'something' can vary for different people.

popcorncowboy• 4 years ago

Nonsense. It doesn't have to be a perfect model to still be a useful one. It's precisely because it's so unintuitive that it's interesting. Your introduction of a positive sum mechanic doesn't invalidate the model. Introducing a $new_value component still begs questions around who gets access to that value - and if the yard sale model holds, even perfectly equal distribution of that $new_value suffers from exponential outcome drift for anything except ridiculously high ratios of $new:$old - and in the real world, value is disproportionately captured by the already wealthy [0].

But hey, internet for you lazy proles, pull yourselves up by your shoelaces etc.

[0] https://wir2022.wid.world -- The richest 1% captured 38% of all new wealth since '95, the bottom 50% captured 2%.

chii8• 4 years ago

value is disproportionately captured by the already wealthy

value is generated using both capital from the already rich, and labour from the poor.

Over time, labour isn't increasing in productivity. It's capital that's increasing productivity, such as by improving labour's efficiency.

With this in mind, why is it that the rich shouldnt be the ones to capture the new/increased productivity? After all, it is their investment that would make such productivity possible. If you had told the rich that their investments would not actually gain them profit (because labour captured the increases that produces the profit), they would not have invested in the first place.

One way to break out of this cycle is for labour to provide something more than unskilled labour and merely using capital to produce goods/services. For example, research and development, knowledge/skill from education, etc.

thebigspacefuck• 4 years ago

Does it apply better to land/housing or other limited resources?

greenie_beans• 4 years ago

did you read the article or did you just read the first paragraph? it considers some of the criticisms later in the article.

polygamous_bat2• 4 years ago

92% of the US including 86% of people without homes in this country have Internet access.

Good point, but...

We can all make incredibly informed decisions these days.

You need more than internet access to make good decisions. I cannot imagine living without a house or healthcare, eating food picked out of a dumpster behind a supermarket, and then being criticized because I made "less-informed" decisions even though I nominally have internet access at a library where the patrons scowl every time they see me in their peripheral vision.

People won't be able to magically make better informed decisions even with access to the information if they are too busy working three jobs to afford food, rent, or healthcare.

xg153• 4 years ago

Yes, but value is not created out of thin air, you need capital to create value, i.e. you need to be wealthy.

So you could extend the yard-sale model and include a rule that after each round, each $ will turn into $1.5 with some probability.

Guess what? Now the rich players can't just risk higher stakes in the coinflip games, they will also have more opportunity to introduce more money into the game through value creation.

So that would make the outcome even more extreme than the standard yard-sale model, not less.

chii8• 4 years ago

However, the outcome of such a system would be that there's more stuff than ever at the yard sale. Things that didn't previously exist.

Therefore, the fact that new options exist at the yard sale is itself a form of wealth.

0xmarcin2• 4 years ago

I think there is a problem with using money to measure wealth. Maybe a better question may be to check how land or housing is distributed among people? If 10% wealthiest decided one day to e.g. purchase land, the effect would be: 1) equity/bonds or whatever they are using to store their wealth would plummet and crash 2) land price would skyrocket. So suddenly they would not be that rich. I think much of the wealth is overvalued currently, it is like with Bitcoin, the price is crazy because not much people are willing to sell.

int_19h8• 4 years ago

We can all make incredibly informed decisions these day. Better informed decisions than ever possible by all the wealthiest royalty in human history, in literally seconds.

And yet there were numerous stock investing experiments in which random choice delivered similar or better results than respected investment specialists.

It's almost as if, at the end of the day, we don't actually make "incredibly informed decisions".

chii8• 4 years ago

we don't actually make "incredibly informed decisions".

the original argument differentiates between "can" and "do".

It is a form of "victim blaming" - they could've made good decisions, but because they didnt, the outcomes they had were "self-inflicted".

litver• 4 years ago

binomial distribution re-branded as "Yard-sale model"

eyphka• 4 years ago

It’s hilarious that the author blames the yard sale model for their never earning money on vintage watches.

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.

Many markets follow pro basketball player distribution, and unless you believe that steph curry is getting lucky on every shot, implies different model.

mouzogu• 4 years ago

Unless you come from a wealthy situation, the only way to get rich is luck. That's it.

Hard work is worthless, just ask people in the third-world work 18 hours for a pittance to survive.

Of course luck may require certain knowledge, wherewithal and timing. You don't win a lotto without waking up at the right time, driving to the right shop and buying the right ticket.

koonsolo• 4 years ago

You're claiming all the super rich lay in their sofa's all day and waited until they got lucky?

I'm laying in my sofa all day waiting to get lucky. Still, after all this time, still no luck. Maybe next year.

Without super hard work, you won't get rich.

kderbyma2• 4 years ago

Yup. the rich were lucky when they were born. they have a surplus of luck...they can. afford to be unlucky for years and years.....it's the same as the money thing....they can afford to lose

damethos• 4 years ago

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):

https://www.goodreads.com/book/show/39979237-moneyland

Cenk• 4 years ago

An archived PDF version of the paper mentioned can be found here: https://web.archive.org/web/20100527181035/http://www.cmth.b...

theshrike79• 4 years ago

Money follows money.

If I have 10€ and I make 1% profit, I've made a whopping 1€. Now I can buy a few potatoes.

Someone with 1M€ makes the same amount of profit, now they have 10 000€. That's a good few months of living expenses for the regular person.

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.

chii8• 4 years ago

comparing percentage profit is meaningless.

At low monetary amounts (like 10 euros), it's easy to make 1% profit. At high monetary amounts like 1 million, it's quite hard to get 1% profit - much harder than at 10 euros.

Therefore, to quantify the risks, the absolute amount invested must be compared, not just the return %. At $1 million, they took 100,000 times more risk than the $10 investment.

ARK_122• 4 years ago

Does this article also happen to be Robinhood's investment pitch and business model?

ramesh31• 4 years ago

Yes, because R > G.

That's really all there is to it.

kderbyma2• 4 years ago

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....

notwokeno• 4 years ago

The trick IMO is to use your extended family as a network and try to keep things within the network.

People don't like this but not only does it work well it's often more efficient in general.

MisterBastahrd• 4 years ago

No.

Money is better at making money. The system is designed to do this.

If you're making money with your labor, you are at a gigantic disadvantage compared to those who are making their money by investing capital.

blakeburch• 4 years ago

Cool interactions on mobile.

But the poor vs rich game ended up with the poor person going up to $1000 and the rich person going down below $100.

I recognize it's just chance... but it's funny that the results directly conflicted the author's point.

MetaMalone• 4 years ago

Same thing happened to me. Lol

aizyuval• 4 years ago

Unfortunately, it’s a simulation.

Coin flip is pure luck, so there’s no accountability in losing the game. Hence, redistributing the wealth sounds like a fair idea.

The catch is that some people actually believe in luck, so they believe accountability doesn’t count.

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?

burlesona• 4 years ago

There are two core insights here that are actually pretty obvious:

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.

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.

As others have pointed out this is really not a good description of the economy as a whole due to its zero-sum assumption.

However I think it’s a relatively useful analogy for the stock market and how other passive investment markets work.

Passive investment is a larger percentage of the economy than ever before and is increasingly how the “rich get richer.”

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.

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.

snapplebobapple• 4 years ago

Something to keep in mind is that Capital gains are not as privileged as they appear in most places because people making that claim are usually not comparing earning a dollar as a person vs earning a dollar in a corp and flowing it through to the individual, they are comparing earning a dollar as a person to earning a dividend or selling a business. There is still a net positive if you hold in the corp for a long time and avoid the personal dividend tax for years and there are some capital gains exemptions for selling corps but they are smaller than most claims on the subject espouse. If you want to harmonize you have to be cognizant of this and not switch to overtaxing earning through corps

xg153• 4 years ago

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.

A reason why it hasn't gained traction though is that wealth doesn't just give you buying power but also political influence. So especially those who already have excessive wealth would be in a position to block such a measure.

sangnoir• 4 years ago

I remain convinced that unbridled capitalism is incompatible with democracy in the long term, particularly when buying political influence is legitimized.

rayiner• 4 years ago

That, and economists broadly agree that taxing businesses and investment is a bad idea, and that the most efficient thing is a consumption tax: https://www.npr.org/sections/money/2012/07/19/157047211/six-.... Note that this article is from NPR of all things.

cloutchaser3• 4 years ago

Another solution is for the fed to stop pumping the stock market for the last 14 years like crazy and offering free money to the finance sector.

Frankly blaming actual entrepreneurs and business owners for the gains in the stock market is such a misguided target it’s insane. The only reason Musk, bezos and others have gotten so insanely rich recently is because the fed had increased its balance sheet by about $8trn. That money went somewhere.

But it’s not because of “rich people”.

It’s because a bunch of bankers destroyed the financial system in 2008, got bailed out, and never got criminally charged. It’s absolutely insane and it’s fuelling this completely misplaced neo Marxism.

ThunderSizzle• 4 years ago

The other part is the stock market basically became a government-enforced ponzi scheme through 401ks, 403ba, HSAs, IRAs and other tax advantaged accounts. Of course stock prices will go up as long as people are forced to use arbitrary stock funds for retirement to avoid crippling taxes.

dragonwriter4• 4 years ago

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.

There's one substantive and one political issue that are important; the substantive issues is that in an annual progressive income tax system, there are real fairness issues with taxing the outcome of multiyear processes as current-year income at full (whether nominal or, using inflation indexed basis value, real gains). [0]

The political one is that the vrry rich havr predominantly capital gains, and progressive tax with reduced capital gains tax rates is how the capitalist class maintains “the rich pay higher income taxes” as a propaganda point while actually paying lower taxes.

[0] there are fairly straightforward solutions for this, which make irregular income from sources already subject to normal income tax more fair, but they add a little more complication to the overall solution.

dennis_jeeves14• 4 years ago

A very simple distribution solution therefore is to stop privileging capital gains and tax all income equally.

An even more simpler solution would be to take away the all wealth of rich people and divide it among all people. The calculations would be a lot easier. Taxes are complicated.

perfecthjrjth• 4 years ago

Of course, when you become a dictator, you can do that. When will that happen?

theamk• 4 years ago

Someone tried this, it was called "USSR" (a.k.a. Soviet Union)! They started by nationalizing all businesses, and had all sort of interesting laws, like jail time for people without "real" jobs (to prevent people living off passive income). Or jail time for people who were trying to get rich by selling stuff for too high of a price.

Look it up, pretty interesting story. They did have to build a strong border protection force to prevent people from trying to escape the country, but the country still lasted 69 years.

astrange5• 4 years ago

It wouldn’t exist anymore then.

Bezos is wealthy because Amazon investors want to give him money; they don’t want to give you money, so if you had the Amazon shares they simply wouldn’t be worth anything.

dennis_jeeves14• 4 years ago

Had 2 people fall for this already, fellow HNers, my above statement was said in sarcasm. Of course there are people here who are stupid enough to suggest it for real.

gnull3• 4 years ago

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.

You're overthinking it. Sweden made renting out apartments unattractive without all this sophistication, they just regulate the prices and keep them low.

didgeoridoo• 4 years ago

…and has consequently created a housing shortage so severe that their decade-plus waiting list was at one time being considered for the Guinness Book of World Records[0].

Price controls leading to shortages and rationing is basically the microeconomics version of the First Law of Thermodynamics. It has had the same result literally everywhere it has been tried.

The solution lies in the supply. Always. If you want more people to have more of something at an affordable price, you have to make more of that thing.

[0] https://www.bbc.com/worklife/article/20160517-this-is-one-ci...

astrange5• 4 years ago

Don’t Swedes just rent them out on the black market instead?

They also can’t seem to get a sufficient supply of washing machines and instead have a laundry bureaucracy.

Oxidation• 4 years ago

wealth can afford bigger bets and expect bigger payouts

Indeed. It's also quite nonlinear. Being able to afford those gambles whole also reserving a cushion that protects your house and apply to eat is very expensive. Not many people can make signify passive income without leveraging anything. But once you can, it becomes a compounding upward curve. Most people die before they get to the second half of the chess board.

dukeofdoom• 4 years ago

They're better at getting government to give them large sums of money too.

29athrowaway4• 4 years ago

Just read this

http://www.paulgraham.com/wealth.html

CynicusRex• 4 years ago

I don't understand why Jon doesn't lose the $240. Because isn't that what he risked to get his opponent's ("me") $160? Conversely, "me" should've ended up with $1040 and Jon with $960.

0xmarcin2• 4 years ago

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/decrease about half of the time right. So using this model you will lose money in the long run. Or did I miss something?

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.

int_19h8• 4 years ago

If you can only guess correctly half the time, then yes, it would apply to your scenario. But I don't think that's often the case with people who are seriously into collecting something. Chances are good that you know enough about what you're collecting to reasonably anticipate the things that will likely have more staying power.

quaxar• 4 years ago

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

raincom• 4 years ago

What is the optimal size of a bet? This is called "Kelly bet". 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.

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's what experienced traders do--just reduce your position by 50 percent; inexperienced/retail traders tend to increase their position, when things go against them.

gxt• 4 years ago

No. It's momentum and inertia.

than3• 4 years ago

No, rich people think about money, debt, and cash flow very differently.

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've made it impossible for competing banks to enter the market through lobbied regulation that came as a response to their bad behavior.

Read up about the creation of the fed, what they've done, how many bailouts they've done, how many people were held accountable, you'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.

Worse, many people immediately jump to something along the lines of "well that's people being greedy and its a downside of capitalism and we have to do something about that".

The problem with those people is, they don'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.

adamerose• 4 years ago

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.

Intuitively, it seems like everyone is making a fair bet because you're equally likely to win or lose. If you have an initial net worth of $1000 and flip a coin you'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'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'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.

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: https://en.wikipedia.org/wiki/Kelly_criterion#Proof

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:

    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

So the long term geometric return of playing this game is 0.999, and since it'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'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 "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's losses", which is obviously going to result in rich people being favored and gaining money.

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'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't seem like a critique on capitalism or inequality, it's more analogous gambling at a casino.

----

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.

Are super-rich people just better at making money?

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