Thursday, January 7, 2010

Abilities Multiplied -- The Real Secret of the Super Rich Part 3

(This is Part 3 of The Real Secret of the Super Rich.)
In Part 2 we saw that bell curve distributions arise when we add several independent random variables together. They can be coin flips, dice rolls, or the luck factors or choice factors which arise in real life. When we tried to map some computer generated experiments based on this model with the real world wealth distribution in the U.S. we came up short. There were no incomes which could lead to billionaire status in one lifetime.

Perhaps the model is wrong; perhaps we shouldn't expect a bell curve income distribution. Consider Bill Gates. He was very intelligent, interested in computers, and interested in business. He had access to computers as a child when very few others did, and he had a well-off family to support him when he launched his business; he did not have to sell off parts of the company early on. I could list more abilities, circumstances and personal choices which led to his billionaire status, but let's just stick to these five. Do they add up?

Do they add at all? Could a stupid person interested in computers write a BASIC interpreter? Would a brilliant person uninterested in computers write a BASIC interpreter? Even if that brilliant individual was interested in becoming a billionaire, would he go into programming with a vengeance years before there was real money to be made? Lacking either intellect or interest in computers, Mr. Gates could or would not have taken the paths he did. Overwhelming amounts of either quality could not make up for lack of the other. The abilities multiplied.

Excellence in four out of the five factors did work for some of the early microcomputer pioneers. (See Accidental Empires by Robert X. Cringely.) Many of the early pioneers in the personal computer industry were more interested in computers than business. Since the field was so open, competition was weak -- save for Microsoft, which ate many of the other companies for lunch. But even these relatively uninterested in business players were interested enough in business to start businesses vs. work for the government or academia. They just didn't play as cutthroat as Bill Gates. So the multiplier model still applies.
I extended the program I used for Part 2 to allow multiplying distributions together. Let each of the five qualities for Bill Gates be modeled by five twenty-sided dice. (I went for dice instead of coins because when multiplying, zero values have a huge impact. If we get zero for any quality, then the product is zero.) Then for each round, we roll the five dice, add the result and do so again four more times and multiply each result together. Do so a million times and you get this:

Rescale to the median and standard deviation of the U.S. income distribution and we get the following. (The y value scales to the bin size I used, which is much smaller than what I used for Part 2. I should go from bar chart to proper probability distribution, but I'm too lazy.)

Aha! we are getting somewhere! Many people are clumped near the median income, but we have a "fat tail" off to the right: more six figure incomes than a Gaussian distribution would give us. But still, no multi-million dollar incomes. The maximum income for this experiment was $550,000.

Maybe we need to consider more than five factors. Let's try ten:

You cannot tell from the graph, but looking at the raw numbers, we do a bit better. This experiment gave us 116 families making $940,000 per year. Still nowhere near Bill Gates levels of income. Also, the model starts breaking down at the low end: I don't get anyone making less than $18000/year. (Then again, when you factor in welfare benefits, this might be a decent model...)

Applying the Secret

Our model so far is imperfect, but it significantly improves on the additive model which led to a bell curve. We can apply this multiplier model to both personal performance and policy. So if you are trying to get rich or you're trying to keep the uber-rich from dominating the country excessively, I now have something you can use.

The first thing to take away from the above experiment is that I didn't use every useful human capability, strategy or circumstance to model Bill Gates. I didn't include charm, good looks, political connections, or physical strength. Not all qualities are relevant to all success paths. But most success paths do require more than one quality. Pick a success path which uses several qualities in which you excel and you are on your way.

Here is something to excite the ambitious: consider a success path that is a function of 5 qualities. What happens if through sacrifice and hard work you manage an across the board doubling? Do you double your output? No, you increase your output by a factor of 32! (2 to the 5th power). Keep this in mind when some guru says just focus on your strengths or your passions. If any of your weaknesses come into play in your chosen career path, it still profits you to work on them. Consider the case of the testerone-filled talented athlete from a rough neighborhood. Such an athlete may have a weakness in the anger-management/self-control area. But since jail time or league expulsion can be very expensive for a superstar athlete, effort in this area is still profitable.

That said, it does pay to work on your natural talents first. If you double your performance at any link in the chain, you get a doubling overall. Early on, it is far easier to enhance your natural abilities through practice and study than it is to remedy your weaknesses. However, as time grows on, you will saturate a bit. In absolute terms your greatest opportunities may still be your natural strengths, but in relative terms, working on (relevant) weaknesses becomes more profitable. Fortunately, after your strengths have been developed, the payback for relative improvement in relevant weaknesses goes up, so even if such efforts are still unpleasant, the rewards have gone up.

Many a startup business leader started with a passion for the field he or she worked in. Only after success in developing a product or service did the finer aspects of business management, marketing, etc. become truly interesting. You don't have to go to business school to become a tycoon. Get far enough in a business your are talented and passionate about, you will gain the interest in what they teach in business school -- along with employees/partners from same.

There, I taught those of you who came to this site looking for get rich quick schemes far more than you'll learn from reading The Secret or many other mind-game guru books. Now, for those interested in public policy.

Our public schools were meant to equalize opportunity, to help those children whose parents either cannot afford education or are uninterested in providing it for their children. Any improvement in the public schools is a chance to equalize up, to make the poor richer vs. making the rich poorer.

Now consider the public schools in the light of our success model. Relative improvement in any of the factors leading to success multiplies overall success. Relative improvement is easiest to achieve early on for those areas where the student is naturally interested and/or talented. Only after these areas have been saturated does it really pay to work on weaknesses.

So what do our schools do? They hold back students to the learning rate of their weaknesses. If you excel in math but poor in language, you get held back overall to match your language learning ability. If you are potentially brilliant artist, you still have to wait until high school to take a real art class. (This may not hold for the better schools.) If you are a natural athlete but poor academically, you aren't allowed to play on the varsity squad.

The power-nerd math genius should be taking advanced calculus in high school even as he is still mastering basic social skills and writing. The poet should be taking college level creative writing even as she struggles with basic algebra. The athlete from the ghetto might well take remedial public speaking and finance during the off season during his career years, after dropping out of college to make a multi-million dollar salary.

This doesn't mean the schools should allow children to focus only on their strengths. It means don't spend more time on the weaknesses than the strengths. It means let the talented leap forward in their particular skill areas while they muddle along in their areas of weakness.

Finally a personal application: promoting this very web site. Readership is a function of how many people find it times how interesting it is to them once they get here. Some Internet marketing experts write that I should spend more time promoting the site, getting links and the like, than producing the content itself. And they are right to first order. If I were to write articles elsewhere pointing to this site, commenting on other blogs, etc. readership would be much higher here than by my writing lengthy quality posts based on research and experiment. But I don't like link-building. So I write what I hope is good content (and the repeat visitor stats indicate someone likes this stuff), and spend less time promoting it. Eventually, there will be enough content to make it worth promoting even for me.

But I'm hoping for a higher order effect. If the quality is good enough, some of the visitors will do the linking for me. And if enough do so link, the search engines will bring in yet more visitors. Traffic will snowball. And this, my dear readers, points to two other important nonlinearties. We have more yet to explore regarding the real secret of the rich. Stay tuned.


Paul said...

Ah, finally! The blackbody-esque curves I've been looking for!

Okay, so here's my next mathematical pondering:

You mentioned that not all skills were relevant to all fields, i.e. physical strength was irrelevant to Bill Gates, and is, in general, the case in the field of computers altogether. The same thing can be said about any other field.

If we make the assumption, however, that people have, say, 20 traits of 20 degrees of giftedness (20-sided die) but were allowed to use their top 3 or so dice rolls multiplicatively and ignore the others (as they are practically irrelevant)... perhaps we would see the spread more closely resemble the real-world income distribution.

Or maybe that's where you're already going with this...

Regardless, this will be a homework project for me...

Carl M. said...

Actually, that is not where I was going, but you make an excellent point! Maybe I should tweak my simulations to do your algorithm. If time ever permits...

Anonymous said...

It's May. We want the real secret!

Michael Bindner said...

You are flirting a bit with social Darwinism. Of course, you are still correct about how multiple factors make people rich - and how letting people emphasize their strengths is good public policy - however - we need more on the topic of how to unlock the grip the rich have on power.

I am not necessarily in favor of making the rich poor. What I do favor is bring about employee ownerhship so that wealth loses its power advantage.

EastwoodDC said...

I think you are underselling the value of a general education. Under this model the sum of all incomes is maximized when everyone is average. Now I'm not suggesting that we should strive for everyone to be average, but that the greatest benefit to society comes from improving that average.

I'll see about sending a link your way too.