Are the Top 1% Just Lucky?

I expect some folks who oppose the Occupy movement will weigh in on merit – that the top 1% are deserving of their riches because they include people who pay a lot of wages and salaries for ordinary folk. That is, the story of hard-working, risk-taking entrepreneurs who should not be punished for being successful.

I don't really have any opposition to people who work hard and become successful, as long as they pay their fair share of taxes as "dues" for living in a country that enables that success. But there is good reason to think that luck may matter more than hard work. There is a lot of inherited wealth out there, a form of genetic luck I've seen up close, that perpetuates inequality over the generations. But little things like flukes and chance encounters can also be huge.

A couple articles are worth a look in full, and I've just extracted some key messages below. Fortune magazine has some nice case studies mixed with evidence in this (slightly dated) article:

For those of us who believe we are the masters of our fate, the captains of our soul, the notion that a career might hinge on random events is unthinkable. Self-made men and women are especially touchy on this subject. If they get all the breaks, it's because they're smarter and harder working than everyone else. If they know the right people, it's because they network the nights away. Luck? Many successful people think it diminishes them.

Hard workers do get ahead, no doubt about it. So do people with charisma, uncommon ability, and great legs. But then there are folks like Ringo Starr. One day he was an obscure drummer of limited talent from Liverpool; the next day he was a Beatle.

... Chance may favor the prepared mind, but to one degree or another, chance happeneth to us all. As Northwestern sociologist Christopher Jencks wrote in his seminal work Inequality, financial success often depends on "chance acquaintances who steer you to one line of work rather than another, the range of jobs that happen to be available in a particular community when you are job hunting, the amount of overtime work in your particular plant, whether bad weather destroys your strawberry crop, whether the new superhighway has an exit near your restaurant, and a hundred other unpredictable accidents." In the broadest sense, then, luck is the great "but for" in life: But for this or that bit of luck--good or bad--you would have married a different person, had a different career, lived in a different city.

... USING census data and a 20-year longitudinal study of 5,000 families, Jencks and other social scientists controlled for all sorts of variables that might pave the way to wealth and power, including parental income, the neighborhood a person grows up in, education, occupation, and test scores. Concludes Jencks: "We can account for no more than 50% of a person's success. The rest is a combination of our inability to measure things--and luck."

Part of what Jencks can't easily quantify is personality, and that, we know, can make or break a career. But isn't it also a matter of luck whether or not your particular personality suits the task at hand? "An administrator is quite likely to earn more money if he or she is good at pouring oil on troubled waters," says Jencks. Then also, someone who can downsize without a hint of remorse will be highly valued in a top-heavy organization.

... Luck falls on rich and poor alike, though not in equal measure: People born into poverty are less likely to succeed than those who aren't. "There is stickiness at the bottom, just like there's stickiness at the top," says Mary Corcoran, a professor of public policy at the University of Michigan. Her data show that children raised in a family whose income is below the poverty line end up earning 30% to 40% less than those whose parents' income is two to three times that at the poverty line. Breaking the cycle is tough, but not impossible: The poor have to either work a lot harder than most people do--or get a lot luckier.

Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events. ... [A] disproportionate number of pro hockey players owe their success to the accident of having been born in January, which made them the oldest, most experienced players in every youth league growing up. For that reason alone, they were more likely to make all-star teams, receive special coaching and eventually become professionals.

Although people are often quick to ascribe their own success to skill and hard work, even those qualities entail heavy elements of luck. Debate continues about the degree to which personal traits are attributable to environmental and genetic factors. But whatever the true weights of each, these factors in combination explain nearly everything. People born with good genes and raised in nurturing families can claim little moral credit for their talent and industriousness. They were just lucky. And they are vastly more likely to succeed than people born without talent and raised in unsupportive environments.

Even in markets where luck plays no role, minuscule differences in performance often translate into enormous differences in salaries. ... As economists have only begun to realize, pay differences often vastly overstate differences in performance — not only in traditional winner-take-all labor markets like entertainment and sports, but also in more conventional arenas. In law, consulting, investment banking, corporate management and a host of other occupations, the ablest performers are often paid hundreds or even thousands of times as much as others who perform nearly as well.