Wednesday, April 20, 2016

Luck - III

According to the economist Sherwin Rosen, inequality comes about because of a tournament effect where a person who is only slightly better gets the entire jackpot while others get next to nothing. The effect of asymmetric results can also come from an initial arbitrary push ultimately giving that person cumulative advantage even when no initial skill difference is involved. The sociologist Robert Merton also showed how an initial advantage can follow a person through life which he called the Matthew effect.

The idea of cumulative advantage is that once a person gains a small advantage over other persons, that advantage will compound over time into an increasingly larger advantage. This idea applies to anyone who benefits from past success - individuals, companies, actors, etc. Disadvantages are also cumulative with an initial failure due to random reasons stalking the person for the rest of his life.

When stock markets collapsed following the bursting of the housing bubble many fresh graduates in the US got caught in the ensuing recession. They had to take up lesser paying jobs in industries that were not their first choice. When the economy started recovering a few years later, these people had to start at the bottom of the ladder if they wanted to go back to their preferred sectors and had to compete with younger fresh graduates because their experience was not relevant for the new job. Hence an event entirely outside their control has saddled them with a disadvantage that will dog them throughout their lives.

In Outliers, Malcom Gladwell writes about the concept of the 'self-fulfilling prophecy' by Richard Merton. Here is how Merton put it in his original essay:  “The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behavior which makes the original false conception come ‘true’.  The specious validity of the self-fulfilling prophecy perpetuates a reign of error.  For the prophet will cite the actual course of events as proof that he was right from the very beginning.”

For example, for admission to kindergarten, a child has to have completed a certain age so there will be a few months difference between the oldest and youngest child in the class. At that age, a few months of extra brain development is significant. The older children will be able to grasp things better and therefore perform better. The cycle of achievement and underachievement, encouragement and discouragement, adds up to a significant advantage over the years. I am quite sure such a process worked to my advantage.

The self-fulfilling prophecy is related also to what Karl Popper called “The Oedipus effect” - an idea that he had discussed in The Poverty of Historicism - the influence of a prediction upon the event predicted.  He called this the ‘Oedipus effect’, because the oracle played a most important role in the sequence of events which led to the fulfillment of its prophecy.

Path dependent processes are those where initial decisions and conditions almost irreversibly affect subsequent decisions which ultimately produce an outcome. It explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though the situation may have changed. Here the future success is determined by the past success. Thus Microsoft or QWERTY keyboard enjoy disproportionate success even though superior products exist. Economists also call it 'network externalities'. Nassim Taleb writes in Fooled by Randomness:
...Brian Arthur, an economist concerned with non-linearities at the Santa Fe Institute, wrote that chance events coupled with positive feedback rather than technological superiority will determine economic superiority - not some abstrusely defined edge in a given area of expertise. While early economic models excluded randomness, Arthur explained how "unexpected orders, chance meetings with lawyers, managerial whims... would help determine which ones achieved early sales and, over time, which firms dominated."
As this Hindi song shows, some people believe that life is all about luck while some believe that life is all about planning. The truth is that both play a role in deciding one's life chances. The successful vastly underestimate the role that luck has played in their lives. Tom Peters, one of the authors of In Search of Excellence , writes in an article TOM PETERS'S TRUE CONFESSIONS, 'In McKinsey's world, all of life is one of two things: strategy or organization.' If everyone had the same opportunities that I had, I would not have got into IIMA.(No doubt you are muttering what Sherlock Holmes told Doctor Watson, 'Your grasp of the obvious amazes me.' )

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