Chance is king — eight ways we can deal with it

Worldly success (wealth, career, status) is distributed in an uneven and, some might say, unfair way. It also waxes and wanes over time, largely irrespective of the talent and efforts you, me or any individual put to work. Recently, researchers at the Italian University of Catania (Pluchino, Biondo and Rapisarda) have finally provided robust mathematical proof of this timeless truth. According to their large-scale quantitative simulations, sheer chance (or should we say forces which cannot be controlled or accounted for in a logical manner) is the predominating factor for obtaining wealth and fame. For sure, to achieve anything we still need a modicum of talent, which includes the ability to work hard. Talent is a hygiene factor. But the most talented are hardly the most successful. Average ability together with repetitive streaks of good luck is most likely to keep the “success breeds success” wheel turning in the real world.

Pluchino et al proceed to suggest how this sobering truth may lead to a new way of funding scientific research. In line with for instance Kahneman’s findings, they explain that rather than backing academics with a proven track record of scientific breakthroughs, it is better to sponsor a large indiscriminate group of researchers. As with investment management, scientists’ past performance is largely random and thus no indication whatsoever of future results. Focusing on present achievers actually reduces the chance of new scientific findings coming up. Plausible as the latter strategy may seem, it is actually counterproductive.

Anyone who takes a moment to reflect on the results understands that its implications reach far beyond the academic realm. On the individual thinking man or woman’s level, for instance, the findings prove once again that some healthy stoicism serves us well. But the implications extend far beyond the personal. Here goes for eight proposals how government, companies and managers can sensibly deal with the fact that luck makes the world go round — at least the fame and fortune part of it.

One: Review the tax system

A country’s tax structure should be aligned with the chance factor behind income and wealth creation. This would in principle call for a steeply progressive tax rate of income beyond middle class pay. Private capital gains should also be taxed, provided that losses are deductible as well. Inheritance tax and gift tax may also be levied progressively. Deduction of mortgage interest (originally created to stimulate property ownership for all) should be related to the home owner’s total net worth: the higher this net worth, the lower the deduction. As to business in general, entrepreneurship and re-investment, in other words risk-taking rather than rent-seeking should be rewarded. Thus, corporation tax is to be lowered, possibly financed by a dividend tax increase. Investment- and innovation-related tax breaks are to be extended as much as possible.

Two: Introduce or re-establish school uniforms

This may sound like a trivial matter, yet it is anything but. Children should be raised and educated in an environment which offers a level playing field for all, which fosters solidarity and which focuses on talent development more than anything else. School uniforms are an excellent way to sustain these goals. No longer will expensive-looking or, conversely, thrifty clothing earmark (or should we say scar) youngsters early in life, in their formative years, without their being able to do much about it.

Three: Steer clear from affirmative action

At school as in professional life, positive action based on other criteria than talent is generally counterproductive. Since the chance factor is so predominant for the population at large, it is generally unwise to distinguish supposedly disadvantaged subsegments who would merit special support. This would likely lead to unfair preferential treatment of these very groups. This is why genuine talent will always feel embarrassed about affirmative action, even or especially when it benefits them personally. It can be as negative a force as discrimination (which should of course be banned first).

Four: Shorten the tenure of board positions

Why not have an annual or bi-annual change of the guards? The ancient Romans appointed their consuls for a one-year term only. There were two of them in charge simultaneously, and their successors were already announced mid-term. With such a limited tenure there is less chance of hobbyhorse projects festering or getting off the track. Dead-end activities will be recognized much quicker and will be reorganized or terminated sooner by equally capable new directors who had no involvement in them. As an additional bonus, there is less chance that self-preserving courts of cronies will flourish, with a vested interest in keeping things as they are, good or bad. A regular shake-up of the powers that be is a healthy thing, as the new research confirms.

Five: Reduce top corporate management pay

The higher than often assumed exchangeability of top managers and the predominance of chance to which they effectively owe their positions should correspond with a level of top executive pay which does not exceed the average worker’s income by too big a factor. In the public and non-profit sectors this is already the case. In the business world, there seems room for a correction; the momentum for this appears to be accelerating. Such a levelling of pay is a good thing, also from a more general societal perspective. Various studies strongly suggest that on a macro level, lower income differences correlate with higher social mobility and lower criminality. Corporate profit-related top management compensation should be abolished altogether.

Six: Make supervisory board appointments less of an in-crowd affair

The classic problem raised by Juvenal (quis custodiet ipsos custodes) gets new and increased relevance with the research findings from Pluchino et al. Typical in-crowd board appointment procedures based on co-optation are outright undesirable, as they come down to one lucky fellow appointing another. Moreover, the successor may well be a clone of the incumbent board members, with the same strengths and weaknesses and therefore with only limited counterbalancing potential. Better, then, to develop a recruitment procedure based on much broader involvement and voting power of all stakeholders. In case of a corporate board appointment, these would include employees, customers, shareholders and financiers at the very least. Obviously, in an ideal world, these appointments too would be for a one- or two-year period, without optional extension.

Seven: When selecting a candidate, look beyond the track record

No matter whether it is about a new hire, an aspiring politician or a candidate up for promotion: attitude and skills are more important than track record. If the latter is to be considered at all, it must be evaluated in view of everything the candidate has had to deal with. This works both ways: what favourable winds have propelled him or her? And what headwinds have caused troubles?

In the same spirit, it would also be wise to promote from within rather than to recruit top scorers from elsewhere. You cannot possibly know these lateral hires as well as you know the talent emerging from your own ranks. And it is highly uncertain whether these lateral hires will be able to repeat their earlier successes in a new environment, in a new round of the game with a new hand of cards.

Eight: Rate anonymously and continuously

Whether it is a wine domain, a restaurant, a teacher, a student or a manager: they should be rated continuously. Moreover, the rating job should be done by a frequently refreshed group of independent, impartial and unprejudiced reviewers, who have no connection with the object of appraisal or any vested interest in the rating results. By people, in short, who are largely immune to suggestibility and misleading heuristics. That way, there is always a second or third chance for everybody and everything, with incidental good or bad luck evened out over time. No need to say that this methodology also spells the end for any form of nepotism. Your son or daughter is unlikely to be the very best future manager of your business.

It may well be that measures like the eight listed above will push society forward from a naive meritocracy to a genuine one, to paraphrase the Catania researchers. It may also lead to a civilization with more tolerance for trial and error and with a higher degree of innovation. Socially, we may achieve more cohesion on one hand and a richer, more natural pluriformity on the other. As to life goals, there will probably be less one-dimensional, energy-draining fixation on material gain or status as ends in themselves. We may well become both wiser and happier.

Pluchino, A.; Biondo, A.E.; Rapisarda, A. (February 20, 2018)

Talent vs Luck: the role of randomness in success and failure.

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