This article describes economic research that 1). Enforces my hypothesis that wealth accumulation is a derivative of chance and 2). Shows how a free market system may help to improve equality.
I’m posting this information to answer someone’s question on how I could believe wealth depends on “luck”. Although I’m still working on some equations of my own, the polymer model in the link above helps support this claim.
One part of the model I find particularly interesting is that the diversity of capital flow determines the equality of wealth distribution. It changes my point of view away from supporting wealth caps on individuals to instead supporting caps on corporation size.
To me the article plainly states that wealth and it’s increase is directly proportional to a) state of the economy i.e. (hot climate) and b) ability to invest in the valleys as opposed to peaks. The latter, you must agree, takes some skill and knowledge of upcomming market trends. Even the ability to forsee developing economies and joining those industries at early stages. This takes a certain case of intellect, foresight and education in leading edge areas. In other words, though mechanical engineering has been a long established and respected profession, the youth of today ought to stay away from this essencially static occupation and choose the more dynamic and growing field of data processing - if only for the improved opportunity of increasing their potential to build wealth.
Also, the article clearly states that disproportionate taxation of the rich has the strongest effect on redistribution of wealth.
Hmm. I am an economist and the New Scientist thing looks like a bunch of goobledegook to me. Mind you it is midnight in Australia and I’ve had a few. I’ll look again (and at the article itself) in the morning.
It looks to me as if all it is really saying is that investment is a lottery which is bounded at the bottom. If you are not broke and you invest, you tend to get richer.
Luck falls into this picture because no one, and I mean no one, can accurately predict “upcoming market trends” without an operational crystal ball. The only people who claim to have this power are stockbrokers who make money whether their investors win or lose.
Well, the pace of the economy is definitely a variable. During a “hot” economy random walks have greater variance, and this is the time when wealth stratifies. During a “cold” economy the random walks are less variable, and this is when wealth solidifies. But the accumulation of wealth has a lot to do with access to capital, and investment skill is a lesser factor.
Or, as the article puts it, “Chop off the heads of the rich, and a new rich will soon take their place.”
True. If you are trying to pick a single stock to make you rich in one week. If you are a day trader then luck has everything to do with it - not unlike gambling.
False. If you are looking at an industry as a whole and predicting that some of it’s more established players will do well in the forseable future based on growing market trends. For ex. High Tech., Bio Tech. If you have the ability to stay in long term then your risks are mitigated by the general economic growth.
Now sure, the economy can go down the toilet at a moment’s notice. But I would not consider that as bad luck. The day traders in this case stand to loose much more than those that can ride out the rough spots. That is why those with investment capital tend to prosper after economic downturns while those betting the farm on some dot.com tend to jump off the bridge when the market goes south. A smart investor knows how to evaluate risks and understands what he can and cannot accept. That way, he does not need to rely on luck.
I would say investment stategy is more important than large amounts of capital if you are just starting out. The importance of these two changes as capital grows because with more capital you develope risk tollerance and hopefully some insurance through diversification of your investments. It’s a changing strategy, not a static one.
And if you think that by chopping off the head of today’s rich increases your chances of becoming tomorrow’s rich then you should not become to emotionally attached to your head. The day after tomorrow may be your day with the executioner.
I’d love to stay and chat more on this topic folks, but I’m off on a mini-vacation to the sea-shore. A sort of last romp for our kids before school starts again. See you Monday.
Yeah, that’s exactly why the market indices outperform most mutual funds. Because those smart, educated analysts can actually predict market trends. Right.
Long term is a calculated risk, day trading is a calculated loss. If your day trading and you make money you fall into the 5% that doesent lose money:)
I’m sorry… did you actully hear me suggest mutual funds or are you just reading what isn’t there?
I am a firm beliver in the fact that if stock brokers could successfully predict the market, they would not need our money. However, mutual funds are sometimes a necessary evil. I use them in my retirement portfolio.