Monday, February 11, 2019

Unequal Access

So I was reading this article on the BBC's website, and I was thinking about how one would go about creating the sort of system that author Anand Giridharadas envisions, one where the winners take less. And it occurred to me that the reason why the "winners take all" as Mr. Giridharadas might put it is that they are the ones who have access to moderate and low-risk ways of increasing their wealth. For all that the lottery is considered a tax on people who have poor math skills, as this Reddit thread from 2014 points out, for many people who play, their chances of landing a big payday from a lottery ticket is greater than their chances of working their way into substantial wealth.

But for the already wealthy, there are plenty of ways of making their next few million dollars that don't come with substantial risks of losing their initial stake. And I'd be willing to bet that if you took a number of people, with $5, $50, $500, $5,000, $50,000 and so on, in savings, that each person would be able to double that amount of money in a given period of time at a lower rate of risk than the person just below them on the ladder. And if you presume that the lower down a person is, the lower their risk tolerance is, you also have the problem that while 100 people with $5 each might be able to match the rate of return of the person with $500, they would have a greater anxiety over loosing their stake, which would make them less likely to look for the same investment vehicles. (Which may, paradoxically, make them even more precarious, as their need for "sure deals" renders them vulnerable to scammers.)

Of course, simply having money isn't the end-all and be-all. Someone who suddenly comes into $5,000,000 or $50,000,000 is quite likely to end up with nothing in an alarmingly short time. Horror stories of what happens to lottery winners abound. Financial literacy, and likely something of an untrusting nature, are also important factors. Which adds another wrinkle to the whole situation. People like Bill Gates, Mark Zuckerberg or Donald Trump didn't come up hobnobbing with people for whom pulling together $5 or $50 dollars to invest would have been at all difficult. The very idea of only having that much to work with would have been alien to them. And so those people, the ones who most need the ability to grow wealth through investment, are saddled with coming late to the party, after the high returns have already been doled out, and having to work through intermediaries, who are using those aggregate investments are low-risk vehicles for themselves; passing the risk along, but taking a share of whatever earnings are generated.

So maybe finding a way to invert the risk curve is what is required to change the situation in which we find ourselves.

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