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Is Business and Investment Success Due to Skill… or Luck?

A few weeks ago, my friend and colleague Mark Skousen asked if I would debate Robert Frank at his FreedomFest conference this July 19-22. (It’s well worth attending. For more information, click here.)

I agreed.

Robert Frank is a New York Times economic columnist and the author of several books, including Success and Luck: Good Fortune and the Myth of Meritocracy.

Frank puts forward a thought-provoking thesis in his book: If you have been so economically successful that your income and net worth put you in the top 1% or 2% in the country, the deciding factor was not talent, education, hard work, risk-taking, persistence, resilience or all of the above.

It was luck, plain and simple.

After reading the book, I took an informal poll of family, friends and neighbors.

What I learned is that, with a few exceptions, individuals who have experienced a great deal of economic success believe Frank’s thesis is mostly false, that hard work and persistence are the deciding factors in wealth creation. But almost without exception, men and women who have experienced modest economic success strongly agree with it.

Psychologists would say that’s because people have a tendency to accumulate pride and shun regret. We tend to take most of the credit for the good things we achieve in our lives and blame negative outcomes on circumstances beyond our control.

However, I discovered another interesting pattern. Self-described liberals and progressives tend to agree with Frank’s thesis. Self-described conservatives and libertarians do not.

This goes to the heart of political differences between the two major parties.

Democrats generally feel that economic outcomes in life are primarily determined by your identity and your circumstances: whether you were born male or female, black or white, rich or poor, gay or straight, etc.

Republicans tend to feel that, whatever hand you were dealt in life, your economic outcome is determined by your willingness to educate yourself, work hard and take responsibility for your life.

This is a generalization of course, but – in my experience – a fairly accurate one.

We hear these thoughts echoed when Democrats argue for sharply higher taxes on “the fortunate” or, in President Obama’s phrase, “society’s lottery winners.” Republicans, on the other hand, often talk about “personal responsibility” or how government social programs should be “a trampoline not a hammock.”

The truth, of course, is that good and bad luck play a role in everyone’s life.

For starters, you were incalculably lucky to ever have been born. We know this because the possible people allowed by our DNA so massively outnumbers the set of actual people.

You were also extremely fortunate to be born in the modern era.

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For most of human history, we existed on the brink of starvation in a world filled with danger. (Nobody worried about saving for retirement because nobody lived that long. Most people were dead by 25, usually of unnatural causes.)

Even 200 years ago – 6,000 years after the advent of agriculture – 85% of the world’s population lived on the equivalent of less than a dollar a day.

Today, approximately 85% of the world’s population lives in developing nations. That means the odds of you being born in the West were six-to-one against.

How big a deal is this? A very big one.

As Warren Buffett once said, “If you stick me down in the middle of Bangladesh or Peru or someplace, you find out how much [my] talent is going to produce in the wrong kind of soil… I work in a market system that happens to reward what I do very well – disproportionately well.”

Whatever your economic success or political views, let’s give Mr. Frank his due. You were born against astronomical odds. You had just a one-in-seven chance of being born in the West where democratic government, the rule of law, property rights, first-world infrastructure and education, and the lack of any class or caste system paved your way for success.

Furthermore, if you were born more than 50 years ago and are both white and male, you didn’t experience the institutionalized discrimination that would have made your economic success more unlikely.

But then… let’s not get carried away.

Billions of people have been born in the West – and many of them were white and male and from middle class or better backgrounds – and the overwhelming majority of them did not experience anything like the tremendous financial success of Warren Buffett or Bill Gates or Jeff Bezos or Larry Ellison or other famous one-percenters.

So is it possible that the deciding factor with these individuals – and others like them – was just luck? Is the meritocracy simply a myth?

We’ll continue this discussion in my next column. In the meantime, feel free to post your own view in the comments below.

Good investing,

Alex


About

An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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