## Chance Asymmetries - The Rich Get Richer and The Poor?

• 11.3k
There's 8 people playing Texas Hold 'Em. For simplicity, each starts with 1000 chips. Say the first round involves everyone, and the pot is 3200. One player, call him A, wins. At this point the situation is like this:

A: 3200 chips (40% of the entire table's wealth)
everyone else: 600 chips each

At this point A can pretty much bully his way through the game, and he'll win even if he's a mediocre player and the others are all grand masters. What do I mean by bully? This:

If A risks 100 chips, that's insignificant for him, it's less than 4% of his wealth. For everyone else, if they wanna play against him, they need to risk 17% of their wealth. To beat A, they need to risk more than 4 times what A risks every single round. And the bigger this difference becomes, the easier it is for A, and the harder it is for the others, to the point that A can be a virtual idiot and still win. Clearly you can see the result of this - A will most likely snowball into the winner.

Now you can clearly see the parallel with finance. Those who have money need to risk little to participate in opportunities. Those who don't - they need to risk disproportionately much. Therefore the rich get richer and the poor get poorer.

And if you think about it - it's such a small thing that made all the difference. Just 1 round at the beginning of the game, which probably had nothing to do with skill whatsoever. So small differences lead to drastically different results.

Thoughts?
• 2.4k
The cards are the cards, you are just as likely to get a good hand and you can still go all-in.
• 11.1k
I think you are quite right about asymmetric advantages. Possessing substantial advantages (the well-defended high ground; or rich resources; or a corner on beans; or relatively more cash than others -- whatever it is) lays the groundwork for maintaining or gaining more advantages. If one is lucky or careful and doesn't lose it, the advantage keeps delivering.

In life, somehow an "original accumulation" has to happen.

Sometimes the advantages fall from the sky. The western railroads in the United States were given swaths of land alongside their intended routes as an incentive to build and invest in the barely settled areas. The Great Northern Railroad (survives as the Burlington-Northern-Sante Fe owned by Berkshire Hathaway) got great wheat land, timber, coal (still mining it) and other resources.

Sometimes the advantages are the product of shrewd investment, ruthless competition, and the labor of others -- Andrew Carnegie or John D. Rockefeller for example.

Financial assets (see Thomas Piketty, Capital in the Twenty- First Century) are highly rewarding and are somewhat disconnected from production and consumption (unlike steel and oil). Having a lot of financial assets is very much like having a lot of chips in poker.

The original accumulation generally involves the exploited labor of others -- Andrew Carnegie couldn't make enough steel himself to make a difference to anyone. The highly paid help at Apple Corporation doesn't make phones, computers, or music. Other people do that -- generally not at much profit to themselves. Apple employees design and manage. A lot of "original accumulation" has happened there (and at other corporations, of course).

So, the asymmetry of wealth depends somewhat on chance opportunities, but it must rest on exploitation and quite often the exploitation has been simply horrific, appalling, and ghastly.
• 1.9k
Wall-mart is a good contemporary example of a run-away industry leader who can arbitrarily raise the stakes hand after hand until you go broke.

One long term economic strategy is to lose money in the short term to underbid all your competitors and put them out of business so that afterward you own a bigger share of the market. Monsanto does it to farmers (apparently) and wall-mart does it to small business owners. There's probably a name for it...
• 11.1k
Wall-mart

Good example. Amazon?
• 1.9k

I want to say yes but I'm not sure... (admittedly I've never been interested in amazon beyond using it to get computer parts and random books)

When wall-mart is through destroying local businesses they jack up their prices and hire all the out-of work community members all on part-time shifts for minimum wage. They contribute nothing to any community other than to drown it in a temporarily affordable wave of stuff. They will pollute the grounds around their stores (which sometimes sits in the center of a particular town) and then abandon it because paying fines and moving elsewhere is cheaper than cleaning it up.

I think Amazon might be different in some ways. They don't pollute (that I know of) and they are guaranteed to pay their employees more than wall-mart does. They don't exactly make all retail stores competitively obsolete like wall-mart does, but they probably hire fewer people overall.

I guess it mainly comes down to whether or not Amazon is willing to deliver long term value. A benevolent king could be a great thing right? Heh... With the ease of online competition though, I wonder how much slack Amazon actually has to exploit.
• 11.3k
The original accumulation generally involves the exploited labor of others
I'm not so sure. I tend to think that exploitation always requires power, and just like in the poker example, the bullying only begins once that power is already obtained.

But it would depend how you define exploitation, so how would you define that? Because for example I have clients earning 100x what I earn from websites/advertising that I've done for them. One could consider that exploitation too, because they get disproportionately large incomes from my labour, compared to what I'm paid.

Sure, Andrew Carnegie or Rockefeller did exploit - but only after they were already big organisations. Both Standard Oil and Carnegie Steel started as small operations. When they were small companies they simply didn't have the strength to oppress. Same for Wal-Mart now. When it first started, there must have been other supermarkets out there. So exploitation doesn't tell us why Wal-Mart got big in the first place, it tells us why it stays big now.

The highly paid help at Apple Corporation doesn't make phones, computers, or music. Other people do that -- generally not at much profit to themselves. Apple employees design and manage. A lot of "original accumulation" has happened there (and at other corporations, of course).
Or take this example. Apple can exploit now - and it could exploit because even when Steve Jobs had just returned, Apple was still a billion dollar company - it had a lot of resources available.

So I think this "original accumulation" is often the product of either (1) chance, (2) hard work, (3) catching the right opportunities. For example. Mark Zuckerberg. I don't actually think Mark Zuckerberg is a great businessman. I think if he had just been born in a different place, he probably would have been a psychologist (what he was initially studying at Harvard) or a small time businessman, but certainly not a great business success. He was lucky - he landed on a pot of gold. Sure, he's a smart guy, but there's many smarter guys out there, including businessmen that are a lot more savvy.

Same for Bill Gates. I mean look at him. Does that figure inspire business confidence in you?! No, but he was one of the few people to get really early in the computer industry, made a lot of money really quickly, and then just used that to get richer and richer - hence why he's still worth like what, $80-90 billion despite claiming to be giving so much of his wealth away. There are some skilled businessmen too though - Michael Dell comes to mind, or Elon Musk. But there's definitely a high degree of luck in going from small to big - a lucky break. Going from big to HUGE quite possibly (in many cases) does involve "exploitation" but I'm waiting to see how you define it! • 11.3k The cards are the cards, you are just as likely to get a good hand and you can still go all-in. Yes but if someone having 600 goes all-in and loses, he's finished. If someone having 3200 goes all-in (meaning he puts just 600 because that's all the others can pay) he merely loses 19% of his wealth. Not a big disaster, he can recover. That's the asymmetry. • 11.1k When wall-mart is through destroying local businesses they jack up their prices and hire all the out-of work community members all on part-time shifts for minimum wage. They contribute nothing to any community other than to drown it in a temporarily affordable wave of stuff. Walmart doesn't just destroy the competition, they are very hard on their suppliers -- forcing down prices until the companies are forced to take their manufacturing to the lowest paid workforce overseas or go broke. And not everything in Walmart stores is remarkably cheap. A lot of their prices (for things like electronics) are about the same as Target or other mass merchandisers. Specials are cheap, of course. They aren't unique, but they are a very bad model. • 11.3k Walmart doesn't just destroy the competition, they are very hard on their suppliers -- forcing down prices until the companies are forced to take their manufacturing to the lowest paid workforce overseas or go broke. To be honest, I've yet to see a supermarket - even in my own country - that doesn't do (or try to do) EXACTLY the same. It's just controlling the distribution channel. If people absolutely need you to distribute their products, you dictate the terms. • 11.1k I think Amazon might be different in some ways. Amazon is following a different model, in that they have grown the volume of the business enormously without producing a lot of profit for investors. My understanding is that they plow profits back into the business for expansion purposes. Aside from selling stuff, Amazon is a big server farm operator. Google and Amazon both use extraordinary amounts of electricity to run the warehouses full of little black boxes serving up things like The Philosophy Forum and Facebook. But retail has been in flux for a good century and a half. One wave of innovation after another has occurred: First the big department stores up ended retail; then the catalog companies -- early Amazons, really -- came along. In small towns, the regional chain stores (selling groceries) disturbed the local market place. The shopping center was invented. Then more and bigger chains, and finally Walmart. The department stores have mostly died off. There are hundreds of dying or dead shopping centers--structurally sound as far as the concrete goes, but without any business, no cars in the lot. • 11.1k o be honest, I've yet to see a supermarket - even in my own country - that doesn't do (or try to do) EXACTLY the same. That's right. All sorts of businesses are jockeying to be in a commanding position where they can dictate as many terms to customers, employees, and suppliers as possible. Behind a lot of this dictation are the institutions of finance that are demanding maximum profits. • 2.4k The person with the larger kitty can afford to sit in and play more hands than the person with smaller kitty, which means they will have more opportunities to have a good playing hand. The person who plays does not always have to bet, they can fold, sit and wait for a high margin hand, and then they can challenge whomever is playing, in fact many do not bet unless they are the dealer, because they want to bet in the last position where they can see what others have bet. It is a rare game where the person who wins the first pot ends up winning the entire game, probably because most bettors are more prudent. They set limits on their bets and will not risk betting a major portion of their holdings, unless certain other conditions are met, such as holding a full house, four of a kind are similar strong hands with no apparent other contenders in sight. You can have the biggest kitty on the table, but if you keep getting dealt [7,2] or similar under, you will not have the biggest position for long. • 11.1k So I think this "original accumulation" is often the product of either (1) chance, (2) hard work, (3) catching the right opportunities. Chance certainly plays a role. Having the right idea at the right time in the right place and pitching it to the right investor is often a matter of sheer, unadulterated good luck. Of course entrepreneurs work hard: To bed late, up early, on the phones, running around all day negotiating, taking risks, doing research -- all that. They hope to be rewarded handsomely. The hard work that is generally not rewarded so handsomely is the hard work of people hired to turn the ideas into profits. Like the employees at Walmart that VagabondSpectre was talking about. Or the employees of lots of companies who are not well paid. Apple is not the norm. The exploitation that I was referencing earlier is just the bedrock of manufacturing. Workers create products which are worth more than their wages. Even though the UAW workers at GM, Ford, and Chrysler were well paid--very well paid after WWII--and even though the auto companies payrolls were gargantuan, the workers produced automobiles which sold for far more than the workers made. That's why autos were blue chip stocks for a long time. Thats why the old American Telephone and Telegraph company (ATT - the Bell System) was the bluest of blue-chip stocks: their employees produced products and services at a low enough cost that the revenues of the companies greatly exceeded them. The shareholders of the auto companies weren't working; the board of directors of the companies weren't working. It was the manufacturing workers who produced the profits. As many companies have discovered, someone else's opportunities can be the occasion of their collapse as well as their growth. • 11.3k The person who plays does not always have to bet, they can fold, sit and wait for a high margin hand, and then they can challenge whomever is playing, in fact many do not bet unless they are the dealer, because they want to bet in the last position where they can see what others have bet. Yes, I am aware, I am a poker player myself. I simplified the example on purpose to illustrate the point. It did happen though before that I won a really big first hand, and then proceeded to dominate the game really easily, which is what inspired me to think about it. How much easier that was compared to when I was on the losing end, trying to climb back up. That latter one was almost impossible. But either way. If I had the 3200 I would be asking 100 every round at the beginning before the flop. So just to join the game, you'd have to risk 17% of your wealth. Even if you were landed [A, A], and I was landed just decent cards, say [7, 10] I'm still +EV on that because my risk is 4 times smaller than yours. And the probability of winning, even if granted [A, A] isn't that great - it's about 33%. That means more often than not, even with [A, A] - the best cards possible - you'll lose. I have no problem playing you - I lose very little if I do, just 100. So if you play me, and the flop comes, and I have nothing, I'll ask for another 100 (if it's my turn, or if I speak at the end - or towards the end - I'll watch what others do. If I sense someone has winning cards, then I'll fold). If you go all-in at that point, you might make me feel nervous, and I probably won't risk playing you. But you've gained just 200 - nothing. How many times would you need to do that to ruin my wealth? It is a rare game where the person who wins the first pot ends up winning the entire game, probably because most bettors are more prudent. Yes, but I've had games where I won a very big first hand and then won the rest afterwards. It does happen. You can have the biggest kitty on the table, but if you keep getting dealt [7,2] or similar under, you will not have the biggest position for long. Be realistic, what are the odds of that happening? I know 7 2 is the worst combo, but when you're rich, even that one isn't so bad that you don't play it. • 11.3k The hard work that is generally not rewarded so handsomely is the hard work of people hired to turn the ideas into profits. Like the employees at Walmart that VagabondSpectre was talking about. Or the employees of lots of companies who are not well paid. Apple is not the norm. Yes, but they're not risking their own capital are they? I mean you could say some of my clients exploit me too, but I wouldn't put it like that. They're risking their capital to get returns. I'm doing a service for them - I'm risking no capital, just giving them my time. I can't lose. They stand to lose if things go wrong. It was the manufacturing workers who produced the profits. But who was taking the risks? • 11.3k It did happen though before that I won a really big first hand, and then proceeded to dominate the game really easily, which is what inspired me to think about it. How much easier that was compared to when I was on the losing end, trying to climb back up. That latter one was almost impossible. It's funny that people think they were lucky - but the truth is that they were just exploiting an asymmetry generated by pure luck. They say "Oh I kept getting great cards!" - but the truth is they just kept winning. Why? Because they were risking nothing while forcing everyone else to risk big time. • 11.1k But who was taking the risks? Everybody. The investment groups that fund large projects; the entrepreneur who has put up his own funds and borrowed more; the employees who risk injury on the job, unemployment, and lost opportunities. Not all risks are the same. But, the worker who depends on a job to exist in many ways has much more to lose than the investors and bankers who will not starve if the project falls apart. Entrepreneurs are sometimes bankrupted. • 11.1k Game of cards bit from a W. C. Fields movie (1930s...) a player: "Is this a game of chance?" Fields (the dealer) "No, not the way I play it." • 143 Sure, Andrew Carnegie or Rockefeller did exploit - but only after they were already big organisations. Both Standard Oil and Carnegie Steel started as small operations. When they were small companies they simply didn't have the strength to oppress. Strength is relative, even as small operations they had the leverage to dictate terms to desperate people, and there's always a surplus of desperate people. Do you think the men working John D.'s oil rigs had a living wage, overtime, health insurance, worker's comp protections, pensions? No, they were overworked and underpaid, and if they got sick or hurt or just got old, they were cut loose. How many poor communities do you think Rockefeller screwed out of their land for pennies on the dollar? You don't become the richest man in the world by being fair and compassionate, you get there by cunning and ruthlessness. There is no fair and ethical way to make a billion dollars. • 11.3k Everybody. Sure but the risks aren't the same. If I design and build an online shop + a marketing campaign to build traffic and get conversions for a client my risk is what? I get paid 50% upfront, 25% only when I give access, and the last 25% based on results I generate for them. It's almost 100% risk free for me. What can happen? At worst, I lose 25%, not a big deal. I'm already profiting even just from the upfront payment. So all I lose is some time. But my client on the other hand loses all their investment, including the time they spent sourcing products, negotiating with suppliers, paying for the website, paying for company incorporation, accounting fees, etc. So is it fair that they can gain 100x what I gain from my labour? I think so. They're risking a LOT more. the employees who risk injury on the job This depends on the job, not all jobs involve this. But, the worker who depends on a job to exist in many ways has much more to lose than the investors and bankers who will not starve if the project falls apart. I disagree. The worker can always look for another job - he never loses actual money - just a source of income. If the entrepreneur loses his money, he's finished pretty much (as an entrepreneur at least, until he gathers up sufficient capital again). Big investors and bankers will not starve by one project failing, but a small time investor will. As I said - the size asymmetry protects them. But the size asymmetry doesn't explain how they got the size asymmetry in the first place! There is no fair and ethical way to make a billion dollars. I doubt this is true, simply because a lot of the "billion dollar" level fortunes are made with a big deal of luck. It's not impossible to make a billion dollars if you're sitting on an industry where the demand is meant to explode in the coming decades, and you're positioned such that you can capture most of it. Exploitation is really penny pinching at that level. If I make$1 billion in profit, does it really matter if I pay 50% tax or 20%? (the difference between $800 million and$500 million). Does it really matter if I pay my workers 50% more? Sure that will cut into my profits, but if I have a really strong operation it still doesn't matter. I would still be making a huge profit provided that my profit margin is big enough.

How many poor communities do you think Rockefeller screwed out of their land for pennies on the dollar?
Only if it was this easy. It's very difficult to buy land for pennies on the dollar. What you'd need to be able to do that is find people who are desperate to sell - they need the money because someone died, for an accident, or an illness, etc. Sounds quite easy. But how will you actually find those people before anyone else does? The only way this will happen is if you're already quite a big (big is relative - you have to be big in comparison to your community) real estate agent or investor, and you have an entire network built up to source deals for you.

Even with regards to foreclosures. Many think "Ahh easy, let's buy a property at 50% value from the bank". The bank isn't dumb. Their own people are evaluating that property when the 50% value is calculated, and of course they'll overvalue it. Just like when you see shops putting up 80% discounts, while the items are still at their regular prices. To actually get the good foreclosure deals you have to be a big investor. Then the bank calls you up, before anyone else, to offer you the deal.

As I said, these are competitive advantages that form barriers to entry for everyone else. They're not easy to overcome. It's like the size advantage in poker, once the asymmetry is established, it's almost impossible to break through it, except by fortunate circumstances.

So how did Rockefeller actually become rich? Luck + Discipline. He was there at the beginning of the oil industry, when it was so easy to make money in oil that people became millionaires overnight from it! It was like a gold rush. Everyone was making money, and LOTS of it. Rockefeller was simply the most disciplined out of all of them. When everyone else was busy enjoying the quick money they were making, and feeling no pressure to make their operations more efficient because the money was good, Rockefeller did just that. But what enabled him to do all that was the huge pent-up demand for oil - big earnings meant power, and power, used with discipline, could be consolidated into an unbreakable advantage.

If it wasn't for the oil industry, Rockefeller would've been just a regular, but wealthy man, who saved and took care of his money.
• 4.9k
How did A win that first hand? Couldn't you say that he had no control over the hand he was dealt? The same could happen in the next round for someone else, and there are always the tactics of cheating and bluffing.
• 11.3k
How did A win that first hand? Couldn't you say that he had no control over the hand he was dealt? The same could happen in the next round for someone else, and there are always the tactics of cheating and bluffing.
It's a combination of circumstances that accounted for the first win. I sum that up to luck, because it didn't depend solely on the individual's skill.

"Cheating" is difficult in poker - the only possibility is to see other's cards, or control the cards that are dealt or that come up.

Bluffing is fine, but it's not very effective when the other guy towers over you to the extent that even if you go all-in and win, it doesn't affect him very much. He knows that, so the risk you pose by bluffing becomes more minimal from his POV.
• 4.9k
It's a combination of circumstances that accounted for the first win. I sum that up to luck, because it didn't depend solely on the individual's skill.
So A couldn't have a run of bad luck along with the combination of possible bad decision or two?
• 11.3k
So A couldn't have a run of bad luck along with the combination of possible bad decision or two?
Of course it's possible, but he'd have to be very dumb and unlucky.
• 4.6k
There have been lottery wins and millionaire athletes who have squandered their wealth and ended up poor. And then there are those who have invested and created businesses and ended up more wealthy.

It's not all luck. Some of it has to do with being smart with what you have.
• 11.3k
There have been lottery wins and millionaire athletes who have squandered their wealth and ended up poor.
Yes but that's merely the result of complete lack of discipline. That's alike being an idiot in poker and squandering your money away, not putting any speck of intelligence in your play.

And then there are those who have invested and created businesses and ended up more wealthy.
That does involve a lot of luck to be able to make millions. Pure skill and aptitude only takes you so far in the absence of right opportunities.

It's not all luck. Some of it has to do with being smart with what you have.
Sure it's not. Luck gives you the breakthroughs, it's up to you to preserve & expand on them.
• 143
I doubt this is true, simply because a lot of the "billion dollar" level fortunes are made with a big deal of luck. It's not impossible to make a billion dollars if you're sitting on an industry where the demand is meant to explode in the coming decades, and you're positioned such that you can capture most of it. Exploitation is really penny pinching at that level. If I make $1 billion in profit, does it really matter if I pay 50% tax or 20%? (the difference between$800 million and \$500 million). Does it really matter if I pay my workers 50% more? Sure that will cut into my profits, but if I have a really strong operation it still doesn't matter. I would still be making a huge profit provided that my profit margin is big enough.

Maybe hypothetically it's possible depending on the political economy you subscribe to, but I doubt you could provide even a single real world instance of someone acquiring a fortune of that size fair and square.
• 11.1k
Your position is spot on. Fair and square -- no exploitation -- a fortune of almost any size is unobtainable.

After they get done exploiting the workers, they exploited the consumers -- giving and taking a way at the same time. Yes, Microsoft did do away with the rather opaque command based Disk Operating System (DOS) but it also imposed another monopoly of software on PC consumers (outside of Apple). Later other OS came along, but they weren't in a very good position to challenge Windows.
• 143
Yes, Microsoft did do away with the rather opaque command based Disk Operating System (DOS) but it also imposed another monopoly of software on PC consumers (outside of Apple).

And even aside from all the coercive bullying of consumers, competitors, and trade partners, just reaping those kinds of profits can rightly be considered fraud and theft because most of that success is due to the work and investment of others. Mark Twain summed it up nicely -
“It takes a thousand men to invent a telegraph, or a steam engine, or a phonograph, or a photograph, or a telephone or any other important thing—and the last man gets the credit and we forget the others. He added his little mite — that is all he did. These object lessons should teach us that ninety-nine parts of all things that proceed from the intellect are plagiarisms, pure and simple; and the lesson ought to make us modest. But nothing can do that."
• 5.9k
“It takes a thousand men to invent a telegraph, or a steam engine, or a phonograph, or a photograph, or a telephone or any other important thing—and the last man gets the credit and we forget the others. He added his little mite — that is all he did. These object lessons should teach us that ninety-nine parts of all things that proceed from the intellect are plagiarisms, pure and simple; and the lesson ought to make us modest. But nothing can do that."

Precisely why I'm against intellectual property. We had an industrial revolution without intellectual property but all of a sudden it became indispensable to progress. Which is of course a lie.

More generally with respect to this thread, a typical example of pure luck is inherentance inequality. Which is an argument to take away everything and redistribute that wealth among everyone. Good luck with that.
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