NeXters, you’re strong, good-looking, and above average. As recognized persons of genius and talent, what are the odds that you, too, will become a billionaire? Not as good as you think.
Stats 101.
To divine your odds of retiring wealthy, we use a statistics tool called a “frequency distribution” (many of us were introduced to statistics in school and forgot what little we learned within seconds of the final exam). The best known of these is called the normal distribution, often referred to as the “bell curve” because of its shape. An intuitive example is human height—a few blokes are really short, a few are really tall, and in between stands everybody else (btw, the “height hump” for U.S. adults is 67–73”).
Many other human characteristics such as IQ, weight, blood pressure, cholesterol count, hockey skills, and penis length follow this pattern. The majority (of observations) are in the middle, gradually tapering off on the left and right side. Many natural phenomena are approximately normally distributed as well. For example, errors in machined parts, star luminosity, behavior of huge numbers of atoms, width of stripes on a zebra, and the daily returns of the S&P stock index, to name a few.
Pareto isn’t spaghetti sauce.
Retiring as a 30 year-old tycoon should be a shoe-in (see: Champagne wishes and caviar dreams). Ah, but there’s a problem. Although certainly a human characteristic, the amount of moolah you make is NOT normally distributed. It turns out that for income, as well as wealth, the Pareto distribution is more useful. The “Pareto curve” (named after French-Italian economist Vilfredo Pareto) neatly describes many real-world situations that involve “the small to the large.” Here are a few examples:
- Size of human settlements (a few cities plus many hamlets/villages)
- Value of oil reserves in oil fields (a few large fields and many more small fields)
- Number of web site visitors (1 percent of sites capture more than half of total web volume)
- U.S. public policy making (continuous year-to-year, but occasionally dramatically changed)
- Biological evolution (large stable populations, with rare but rapid new species development).
Economists tell us that, on the whole, we have normally distributed attributes, talents, and motivations. But when it comes to income, a small number of extremely wealthy people earn and hold the lion’s share of the riches. Analyzing data from the Internal Revenue Service, econophysicists Anand Banerjee and Victor Yakovenko (2010) confirmed that incomes among the super-wealthy—about 3 per cent of the population—follow Pareto’s law.
Beyond the stratosphere.
So much mumbo jumbo? Hold the phone, Hannah. In a fascinating depiction, author David Chandler portrays 2014 incomes on a sliding scale. Picture your annual family income as a stack of $100 bills on the sideline of a football field. The median (the family at the 50-yard line), at a little less than $55,000, is a stack of $100 bills about 2 inches high. Half of the population made less than this; half made more. Does your family make $155,000? You’re on the 90-yard line and your stack is about 6 inches high.
Now it gets interesting! At the 99-yard line, your income is about $430,000, a stack about 17 inches high. The curve reaches $1 million (a 40-inch high stack) about 10 inches from the goal line. Now, compare Bill Gates, whose greatest estimated one-year increase in net worth was $50-billion. At 30 miles high (gasp), his pile of $100 bills that year extended more than 5 times the height of Mt. Everest. Ordering pasta at that altitude? $1-million is the same proportion of this income as $1 to a person earning $50,000 per year.
Unlike other human characteristics, income and wealth distribution are not bell-shaped curves—they are “L-shaped” curves! And the disparity is getting worse (see: We are the 99%). The income gap has grown to its largest margin ever, prompting some snarky economists to suggest that we now have only two economic classes: the rich, and the rest of us.
NeXters, the odds of attaining extraordinary income or great wealth are so slim that your concern would be more fruitfully turned to the risks of not even being part of the middle class (optimism trap*).
Before you attempt to beat the odds, be sure you could survive the odds beating you.
~ Larry Kersten, sociologist
* Questionable beliefs can “trap” our better judgment, leading to poor decisions and unintended consequences. In the optimism trap, we often overestimate the likelihood that the outcomes we want will occur. Learn more about this, and other interesting topics, in the Young Person’s Guide to Wisdom, Power, and Life Success.
Image credit: “Portrait of a handsome fashionable man with charming woman” by Andrey Kiselev, licensed from 123rf.com (2016).
