A Roll of Dice

Luck is common to all. While we curse our misfortune when it works against us, it mostly hides in a cognitive blind spot for the remainder of our experiences. It shouldn’t, for we essentially have no control over this world around us. It sound’s rather bleak to strip away all sense of freedom and autonomy. Yes, you think you have control, how could you not. You chose what discipline to study at university, you chose the colour of your car, you chose how your eggs were to be prepared for brunch. What is life but a stream of choices? And surely our lives are simply a culmination of those choices. But we do not live in isolated bubbles. Our wealth, our status, our being comes about through the functioning of the society in which we are members. Therefore, these measures of identity arise only after countless interactions of (mostly) self-serving agents, the majority of which are completely unaware of your existence. How much control does one have over this?

To be sure, within the short-term we can gauge the outcomes of a decision fairly accurately, allowing us to make appropriate choices (e.g. if I slap Dave, he’ll get pretty angry at me). Here, I will allow one to have pride in their forecasting abilities. Now as we extend out our timescale of consideration, magnification of errors and stochastic societal interactions start overwhelming any predictions we might make. If you made a critical decision and 10 years down the line your prediction of its outcome proved correct, it is my assumption (and the very nature of this piece) that this is essentially random chance, not divine prescience. Additionally, we can never replay a certain situation ad infinitum to observe the numerous outcomes so similarly possible. As such, we can never know what alternative realities we might have encountered, and what other fortunes (or misfortunes) our decisions might have provided.

The most insidious consequence our disregard for luck has is in wealth creation, and its subsequent lack of redistribution. The issue at the core of this endemic problem is that all of us feel like we earned and, thus, deserve every dollar deposited into our bank account. Such thinking predisposes us to look upon the indigent as less ambitious, less dedicated and less deserving. But is luck the simple force which causes this graduation between those on the streets and those in the Mercedes? Any discussion of luck is a discussion of probabilities, which cannot always be accurately summarised by a single number. A distribution of numbers (be it incomes, net worth etc.) better reflects the reality of the situation and the underlying factors responsible. The distribution of high wealth levels has been noted as following a power function called a Pareto distribution, describing the fact that the majority of the wealth is largely held by a small fraction. Using numerical simulations, Levy & Levy demonstrate that the shape of the Pareto distribution arises when luck, as opposed to any sort of investment talent, is the significant factor driving wealth creation. As the influence of investment talent increases with respect to luck, the shape of the resultant distribution changes from that which is actually observed within society.

Even when considering distributions of wealth, it is very possible that one reading could believe what is true for others is not true for them. They are not just lucky, they actually contributed value to society (in proportion to their compensation, of course). An easy target here is to consider the higher wage employment found in the sector of financial services. Here the value of one’s work becomes at best nebulous, at worst negligible. A summary of The Koffman Foundation’s 20 year record with venture capitalist funds demonstrated that, on average, such investments failed to yield better returns than simply acquiring small cap equity in the stock market (giving annual returns of 3-5%). Examination of mutual funds show that those which are actively managed by highly paid specialised experts underperform simple passive index funds over 1, 10 and 30 year periods. Any few actively managed funds which outperformed index funds in a given time period then underperformed in the subsequent time periods, indicating past performance is not a reliable indicator of future performance. In the examination of VCs and actively managed mutual funds, those which demanded the highest fees from investors performed the worst. Remember, we are considering richly paid professionals whose very job asks them to maximise returns, and are very much financially incentivised to do so. Despite their high incomes, the efforts of participants in this arena are, on average, essentially worthless. So think twice when considering the actual value you are contributing.

On the opposite end of the spectrum is the unlucky conditions which leads those away from the fortunes others have so miraculously fallen upon. How do people go through life and end up on the street? it is easy to derive their situation from the concatenation of poor life choices, but this too ignores any role of chance as a force on their life. Approximately a third of the homeless have some form of mental illness. How easy would you imagine it is for a severe schizophrenic to sit and study through 3-7 years of university, and maintain a decades-long corporate career? Outside of this effect, familial relations and structural effects, such as availability of low-income housing, also act to determine one’s fate on the street. The minutia of an individuals story plays an important role in where they fall on the ladder of society. As these factors, good and bad, are down to the role of the dice, those which have won the proverbial lottery should be more open to distributing their winnings to the similarly chanced losers.

As an addendum, what I find most offensive about this ignorance of chance is how devoid of critical thought it all is. A scientist is required to gather the most robust set of data to develop their inductions. If there is an element of randomness or uncertainty, this must be quantified and included in the model. I can’t ever expect the world to employ the same scientific rigour to every problem. But If we get used to picking and choosing what information we use to inform our outlook of the world, then this confirmation bias will bleed into other parts of our lives; most worryingly, our political stances and then the policies imposed by these parties. That’s some poor luck for society.

Callum Lamont