Luck, & helpful illusions

Here are four pieces of recent research:

- children whose fathers lost their jobs in the 1980s recession did worse (pdf) in school and went on to earn less than otherwise similar children whose fathers kept their jobs.

- good-looking men earn more than ugly ones at any level of earnings.

- children who are bullied at school before the age of 12 go on to get worse grades and are more likely to take drugs or get pregnant in their teens.

- children who are taught in small classes between ages 10 and 13 go on to earn more in middle age than those taught in larger classes.

These apparently different findings have one thing in common. They all show that our fate in life depends upon luck. It's a matter of luck whether your dad kept his job or not; whether you are ugly or not (make-up doesn't get you far (pdf)); whether you're bullied or not; and how big your school classes were.

Granted, the average effects in these papers are smallish. But they are only a tiny subset of the ways in which luck affects us. Whether we get teacher and mentors who inspire us or not, whether we enter (pdf) the labour market in a recession or boom, whether we're members of the lucky sperm club or not and - most importantly - whether we are born in England or Ethiopia are all matters of dumb luck.

Ed Smith is surely right. Our success, or not, in life is surely a matter largely of luck. I can easily imagine that slight tweaks in my fortunes would have made me either a multi-millionaire or a convict - and I suspect the same is true for most folk.

In saying this, I am not taking a purely leftist position. In Law, Legislation and Liberty (ch 8), Hayek said that income inequalities between people "will often have no relations to their individual merits"and decried it as a "misfortune" that people defended free market on the erroneous grounds that they rewarded the deserving.

I fear, though, that mine, Smith's and Hayek's position is a minority one.Far more common is the belief that the successful have earned their rewards whilst the poor should work harder. Why do people belief such nonsense?

The obvious answers lie in cognitive biases. The just world fallacy causes us to find justifications, even spurious ones, for injustice. And self-serving biases cause the successful to believe that success and failure are due to individual effort - and, of course, the opinions of the rich carry far more weight in politics than those of the poor.

But how costly are these illusions? Hayek pointed out that they can have big benefits. The belief that our well-being depends upon our own efforts will spur us to study and work harder than we would if we thought our well-being merely a matter of fate. And this greater effort can make us all in aggregate better off.

There is, then, a trade-off between truth and utility.

Comments

[Zorblog]

You may go further. The fact that Germany is experiencing growth while the South of Europe is enduring its worst post-was crisis may also be the product of luck.

If the crisis had stroke sooner (if the US housing bubble had busted in 2003 for example), Germany would have been the noncompetitive country, with labor costs too high, unsustainable debt and profligate deficits.

You may also say that if the Chinese had no taste for luxury watches, Swiss exports would not be so healthy. Marketing experts may be praised for that kind of taste, but that's still a lot of luck in the first place.

[Shane Taylor]

I would also note Frank Knight, an old school Chicago economist who said:

"The income does not go to 'factors,' but to their owners, and can in no case have more ethical justification than has the fact of ownership. The ownership of personal or material productive capacity is based upon a complex mixture of inheritance, luck, and effort, probably in that order of relative importance. What is the ideal distribution from the standpoint of absolute ethics may be disputed, but of the three considerations named certainly none but the effort can have ethical validity. From the standpoint of absolute ethics most persons will probably agree that inherited capacity represents an obligation to the world rather than a claim upon it. The significance of luck will be discussed below in connection with the conception of business as a game. We must contend that there is a fallacy in the common position which distinguishes between the ethical significance of the income from labour and that from other factors. Labour in the economic sense may represent either a sacrifice or a source of enjoyment, and the capacity to labour productively derives from the same three sources as property ownership, namely, inheritance, luck, and effort of acquisition, and with no obvious general difference from the case of property in their relative importance."

Full essay available here:
http://teageegeepea.tripod.com/ethicsofcompetition.html

Or here:
http://www.jstor.org/stable/1884053

[Account Deleted]

"The belief that our well-being depends upon our own efforts will spur us to study and work harder than we would if we thought our well-being merely a matter of fate".

Yet despite our hard work, we remain prone to superstition (a belief in fate), clutch at straws (lotteries), and begrudge many their good fortune. Conversely, Calvinists (who tend to be hard-working types) believe in the ineluctable fate of predestination (or unconditional election), which is fate with knobs on.

Going further back, you'd be hard pressed to find a correlation between aggregate progress and scepticism about providence in Ancient Greece. A belief in fate does not imply fatalism.

In fact there has always been a tension. Malign fate can be warded off by one's own propitiatory actions (rabbit's foot or accident insurance), but excessive belief in one's own ability (hubris) will literally tempt fate (nemesis).

I think most people are sophisticated enough to recognise that both effort and luck play a part in success, but given the unpredictablity of the latter, you're better off investing in the former. A sort of secular Pascal's wager.

The suggestion that in aggregate we are all better off cannot be proven because there is no meaningful control.

[Chris Purnell]

For a dramatic example of luck at an extreme level e.g. survival: compare the biographical note by Daniel Kahneman in Paris in 1941. He, a Jewish boy, had an encounter with a Nazi soldier. Instead of hauling him off he hugged him and showed the young Daniel a photo of his own son- who he presumably missed greatly. Then he gave him a present. So Kahneman survived and made his wonderful contribution to the worlds intellectual life.

[Anonymous]

"Far more common is the belief that the successful have earned their rewards"

The truth of this statement is confirmed by George Osborne, the most successful chancellor the Galaxy has ever had. Luck played no part in his success. Anyone with a private education, an inherited fortune and a sneer can rise to the top.

[Keith]

Chris Purnell,

That should be German rather than Natzi Soldier.

Presumably one of the majority who never voted for Mr. Hitler. Just as no one voted for the Coalition party that was magically invented in 2010.

[Laban Tall]

"Remember that you are an Englishman, and have consequently won first prize in the lottery of life."

Cecil Rhodes. It was true then, and it's still true now - it's just that the prizes were bigger then.

[Laban Tall]

There are two kinds of luck in play here - the "external" factors - which country you were born in, entering the job market in recession or boom, the inspirational teacher, are extrinsic to the individual.

But if you were born to bright and educated and/or wealthy parents, who've passed on their intelligence and culture (equally a matter of luck), the endowment they've given you is a little more intrinsic to that person - for example, in a recession people aren't generally sacked completely at random. Clever clogs (in my industry at any event) tend to be last out the door.

"The belief that our well-being depends upon our own efforts will spur us to study and work harder than we would if we thought our well-being merely a matter of fate."

Be fair. Even assuming that there's a dice player involved in our lives, study and hard work will tend to make something of even the worst throws - though as PJ O'Rourke points out, plain hard work is no key to success in that the poorer you are, the plainer and harder is the work you find yourself doing.

[Eggcrook]

- "Our success, or not, in life is surely a matter largely of luck."

- "... to study and work harder [...] can make us all in aggregate better off."

Something's not right here...

[davidc]

The race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all. [Ecclesiastes 9:11]

[Keith]

This kind of argument depends on levels of analysis. If you think character traits like hard work or pure intelligence are luck the idea of meritocracy breaks down. All my good or bad acts or positive verses negative attributes are really out side my control so I cannot claim them as justification for wealth or favourable treatment by society. The universe and its laws are luck and so is having good or bad parents or genes. Which is why we "should judge not least we be judged" as the bible says. But mysteriously Mr.Duncan smith never quotes that part; I wonder why?