by dncosta on 12/22/22, 8:28 AM with 563 comments
by burlesona on 12/22/22, 3:46 PM
1. 20% of 1200 is more than 20% of 800. Duh! But the practical insight is simply that people with more wealth can afford bigger bets and expect bigger payouts.
2. Many systems are sensitive to initial conditions. In this model, the first coin flip matter vastly more than all others and determines almost the entire outcome.
As others have pointed out this is really not a good description of the economy as a whole due to its zero-sum assumption.
However I think it’s a relatively useful analogy for the stock market and how other passive investment markets work.
Passive investment is a larger percentage of the economy than ever before and is increasingly how the “rich get richer.”
A very simple distribution solution therefore is to stop privileging capital gains and tax all income equally. But of course this has been considered and hasn’t gained traction.
Another solution is to disrupt passive investment markets. The one that comes to mind is rental housing. If we made it much much easier to build housing then then rental housing market would be like the used car market: viable but not an easy place to sit back and make passive income.
by HPsquared on 12/22/22, 9:12 AM
In a normal distribution, the shape of the distribution comes from a "random walk" left and right from a large number of steps of varying size.
In a lognormal distribution, on the other hand, the random steps are not additive but multiplicative: e.g you multiply the previous figure by a (Gaussian) random variable many times.
This seems to reflect economic reality that people make decisions proportional to the scale of their current wealth. If I make 10k, it would take 2k extra to entice me to a different job. If I make (or lose) 10% on an investment, etc. It's all multiplicative.
The lognormal distribution also has a fatter "right tail" than a Gaussian, which is what we see IRL.
by donatj on 12/22/22, 10:42 AM
> What can the yard sale model tell us?
Literally nothing. It fails to model any part of the actual system. It’s not just lacking complexity, it’s a facetious model lacking in any real aspects of anything involved. There is no choice, no intelligence, no reason. Just random chance.
92% of the US including 86% of people without homes in this country have Internet access. We can all make incredibly informed decisions these days. Better informed decisions than ever possible by all the wealthiest royalty in human history, in literally seconds.
The author could have easily Googled the price for the exorbitant watch before they bought it. That’s entirely on them.
by bmitc on 12/22/22, 9:10 AM
Right now, the middle class is getting slammed with taxes. They make almost all their money through salary and get taxed heavily, while the super rich pay either no tax or a maximum of capital gains, so almost 40% or less than upper middle class in terms of percentage.
Corporations and the super rich have bought out democracy, and what is crazy is that they are supported by the very groups they intrinsically hate and hurt through their policies.
by dhruval on 12/22/22, 9:14 AM
Some thoughts
- consensual trades are win win (you want a sandwich, I want $5 let’s trade! And we both win)
- something about the model is overly simplistic, like it produces a statistical distribution that looks like extreme inequality from randomness, but lots of different sorts of distributions can emerge from aggregating random (for eg a normal distribution several dice and looking at their totals).
by oli5679 on 12/22/22, 9:28 AM
If economic activity is valuable, but leads to inequality, then you need some framework to trade off the value created vs. the social benefits of greater equality.
by ytNumbers on 12/22/22, 9:34 AM
by Gareth321 on 12/22/22, 9:50 AM
Luck is part of it, but there are so many other factors here. When they converge, we often end up with people extremely good at making money. Under capitalism and in principle, this isn't a bad thing. It means they're generating outsized benefit for society. However problems quickly emerge: with economic power comes market inefficiencies. The wealthy can use their power to buy out competition, under-price them (below profit), out-market them, and leverage their efficiencies of scale and bargaining power to maintain a permanent moat. We are seeing all of this occur to an extreme degree in the modern software space. Frustratingly, anti-competitive laws have been on the books for a century, and are sufficiently broad to use. It's just that U.S. politicians lack the will.
Existentially, I believe that power corrupts. Billionaires are billionaires because they created a lot of value for society. Great. But once they're billionaires, they can control the destiny of countries, and this undermines democracy and greater social outcomes. I believe therefore that a balance must exist between deterrent effect which occurs with aggressive redistribution (and the effect is undeniable), and preventing the emergence of ultra powerful individuals.
by kevin_nisbet on 12/22/22, 10:09 AM
It really reminds me of Eve Online. It's been a many years, but once upon a time when I did play it, we were looking at different sensor jammers. And the ones that looked like the worst were actually the best, because they couldn't be countered. Most worked like a +1/-1, but one applied as a fraction. So if the jammer cut a value by 50%, the counter to it added 50%. But adding 50% doesn't get you back to where you started, the opposite increase is 100%. 20 - 50% = 10. 10 + 50% = 15, not 20.
Another one is for the property I live in, we're pushing back on the government about losing a subsidy of ~33%. The property management company, managers, accountants kept sending letters saying this will cause prices to go up 33%. And I keep having to explain that the notices are wrong, removal of a 33% subsidy increases prices by 50%, not 33%.
by theginger on 12/22/22, 9:33 AM
by abigail95 on 12/22/22, 9:42 AM
You can become rich by following the rules of expected value and compound interest.
Backtest this against the population and tell me that people today wouldn't be richer if they made sound financial decisions based on the information at the time. I know I would be richer. The kicker is, wealth inequality would rise along with median wealth, because compound interest. This is so unpalatable for some people that they argue against sound decision making and reduce wealth creation to coin flips.
by mouzogu on 12/22/22, 11:06 AM
Hard work is worthless, just ask people in the third-world work 18 hours for a pittance to survive.
Of course luck may require certain knowledge, wherewithal and timing. You don't win a lotto without waking up at the right time, driving to the right shop and buying the right ticket.
by ZeroGravitas on 12/22/22, 9:26 AM
by mschuster91 on 12/22/22, 9:59 AM
The latter is the elephant in the room, IMO: once you hit 1 million dollars net worth, even a very conservative investment aka government bonds at 1% yields 10.000$ a year, at 5 million dollars it's 50.000$ a year, and at 10 million dollars, it's 100.000$ a year. Basically, once you have reached ~5 million dollars of wealth, you can afford to do whatever the fuck you want (and a bit earlier, if you are willing to risk a bit more and go for stocks). You can choose to not work a day in your life any more and chill out in Costa Rica sipping pina coladas every day, you can go and work for some charity without payment, or you can start up a company and not care how much money you make - as long as you're not actually losing money or spending over the yield of your investments, you literally cannot fail any more. You and your children won't ever experience being poor or homeless.
Super-rich people have it even easier. When you have 100 million dollars or manage to reach billionaire status - why not throw a million or two into some startups each year? Best case, you end up striking a goldmine and making ten times that, worst case you're out of a million dollars but your other conservative investments will make that back in a year.
by 0xmarcin on 12/22/22, 7:16 PM
Returning to the simulation, the coin experiment can be explained using different model: Imagine position X on a line: |A A A A X B B B B B B B B B B B|, X can move either left or right by the amount specified by the rules of the game. But since one person is poorer the boundary | is closer to X. X is doing a random walk, so it will move with exactly the same probability e.g. 5 positions left or 5 positions right. But for the poor player 5 positions to the left means he is left with no money to play again, and for the rich player it means he lost some of his advantage. If the difference is huge like x100 the poor player has basically no change at winning at all. So this game is only fair if A and B have similar amount of money.
by beautifulfreak on 12/22/22, 9:57 AM
by DougBTX on 12/22/22, 9:39 AM
I do appreciate an interactive example that doesn't have a canned result :-)
by kderbyma on 12/22/22, 3:21 PM
by mettamage on 12/22/22, 9:12 AM
I am not sure I believe the reasoning in the title but the effect they show is interesting. Money is power, even in a heads or tails game
by theshrike79 on 12/22/22, 1:05 PM
If I have 10€ and I make 1% profit, I've made a whopping 1€. Now I can buy a few potatoes.
Someone with 1M€ makes the same amount of profit, now they have 10 000€. That's a good few months of living expenses for the regular person.
And this is not even taking into account the access to different people and resources you get just with having enough money to get into the right circles.
by Cenk on 12/22/22, 11:23 AM
by s3000 on 12/22/22, 10:08 AM
Who would make better allocation decisions than some arbitrary elite that happens to be rich? Without those riches, where is the surplus money that can be invested into innovations? Right now, the masses could pool some small amounts of money like $10 and have millions and billions to start new companies.
There was 'Ask HN: How might HN build a social network together?'[1]. I am not aware that something has been started, despite all the skills most likely being available. Without somebody fronting the money to make even more money, how can people be motivated to create progress?
by anovikov on 12/22/22, 9:40 AM
by Febra33 on 12/22/22, 9:32 AM
by bloodyplonker22 on 12/22/22, 9:11 AM
by raincom on 12/23/22, 12:29 AM
If you invest in some stock, and if that stock is moving in your favor, you should increase your bet or leverage more. If your bet is moving against you, cut down your bet size. That's what experienced traders do--just reduce your position by 50 percent; inexperienced/retail traders tend to increase their position, when things go against them.
by blakeburch on 12/22/22, 3:40 PM
But the poor vs rich game ended up with the poor person going up to $1000 and the rich person going down below $100.
I recognize it's just chance... but it's funny that the results directly conflicted the author's point.
by jmeister on 12/22/22, 9:35 AM
>Look, I think it would be better if you had an economic system in which we didn’t have billionaires—but the productivity that billionaires have generated was still there, and that money was more equitably distributed. But, really, there hasn’t been a system that has had equity in its distribution and the productivity that capitalism has had. I don’t see that happening anytime soon.
http://archive.today/2021.04.25-160837/https://www.newyorker...
by eyphka on 12/22/22, 10:50 AM
The issue with applying the yard sale model is when testing against real world markets, almost no market follows the predicted distribution curve, which imo implies that something about the model is incorrect, ergo cant possibly be the reason for continually losing deal on vinyage watches.
Many markets follow pro basketball player distribution, and unless you believe that steph curry is getting lucky on every shot, implies different model.
by quaxar on 12/22/22, 9:32 PM
by aizyuval on 12/22/22, 3:43 PM
Coin flip is pure luck, so there’s no accountability in losing the game. Hence, redistributing the wealth sounds like a fair idea.
The catch is that some people actually believe in luck, so they believe accountability doesn’t count.
Plus, taxing the rich will (and rightfully so) make them leave. And then, who will pay the taxes? Who will create jobs? How many people will lose their jobs?
by damethos on 12/22/22, 11:08 AM
by hardware2win on 12/22/22, 10:03 AM
There is hazard game dice where you have 50% chance to win
But people who run those "casinos" figured many years ago that they will use e.g 90 95% payouts
So this way the longer you plsy, the more you lose cuz even if you bet the same amount twice and win once and losr once then youre behind
by sberens on 12/22/22, 10:37 AM
by ARK_12 on 12/22/22, 2:49 PM
by CynicusRex on 12/22/22, 7:06 PM
by MisterBastahrd on 12/22/22, 3:35 PM
Money is better at making money. The system is designed to do this.
If you're making money with your labor, you are at a gigantic disadvantage compared to those who are making their money by investing capital.
by litver on 12/22/22, 10:44 AM
by 29athrowaway on 12/22/22, 4:51 PM
by than3 on 12/24/22, 12:48 AM
There are also a lot of bad actors at the upper end that are facilitating a global ponzi scheme at our expense, and they will be bailed out over and over again because they've made it impossible for competing banks to enter the market through lobbied regulation that came as a response to their bad behavior.
Read up about the creation of the fed, what they've done, how many bailouts they've done, how many people were held accountable, you'll find it always ends in their favor. Behaviors that would send individuals to jail for decades are avoided by paying a small piece of the proceeds they get from those frauds disguised as penalties. Its been baked into the system.
Worse, many people immediately jump to something along the lines of "well that's people being greedy and its a downside of capitalism and we have to do something about that".
The problem with those people is, they don't know what they are talking about because its not capitalism, you often get monopolies in socialism, and while capitalistic societies are driven by a division of labor, socialistic economic systems are driven by corruption, and what are our the major issues right now? Corruption.
by dukeofdoom on 12/22/22, 4:06 PM
by Gatsky on 12/22/22, 9:33 AM
I used to kinda think along the lines of this post. However, when examining the performance of top investors for example (eg Buffet, Templeton, Marks etc) it is clear it isn’t mainly luck.
by ramesh31 on 12/22/22, 3:15 PM
That's really all there is to it.
by gxt on 12/23/22, 1:51 AM
by gabesullice on 12/22/22, 9:45 AM
I like that the coin flip game illustrates the concept of compounding interest, but it doesn't model wealth creation at all.
Most new ventures aren't I-win-you-lose, they're we-win-or-I-lose. Wealthy people really can take bigger bets more frequently like the article suggests, but it's not necessarily at the expense of everyone else.
A more accurate illustration would be a game where each round you have a choice: bet 25% of your money or recieve $0.30. After each round, you must pay $0.25 to play again. Some people start the game with no money, some people start with $1.00.
If you think this game through, you'll still end up with super wealthy outliers and bankruptcies, but the players in the game actually have some agency.
by adamerose on 12/24/22, 9:08 PM
Intuitively, it seems like everyone is making a fair bet because you're equally likely to win or lose. If you have an initial net worth of $1000 and flip a coin you're equally like to gain or lose $200 and your expected net worth after the flip is still $1000 (50% chance of $1200 or $800) so it's a wash, right? However their simulation kept having me end up poor which confused me, so I ran the same simulation in a Python script. What I found was as the number of flips increases your net worth approaches zero! I found this surprising because if the expected net worth after a single flip is unchanged, I would expect this to stay true for multiple flips. But based on simulations, against my intuition, it seems like this is actually a bad bet in the long term and you'll always lose money. This is still true even if you start to skew the odds and give them a 51% chance to win the coin flip.
So after some googling I found something called the Kelly Criterion which calculates whether a bet is good or bad based on the gains and losses and chance of each and decided to plug in these numbers: https://en.wikipedia.org/wiki/Kelly_criterion#Proof
For the game in the article, the rules are that the poorer person bets 20% of their net worth on a coin flip, so these are the variables:
f=20%
p=50%
q=50%
a=20%
b=20%
r = (1 + f*b) ^ p * (1 – f*a) ^ q
= (1 + 0.2 * 0.2) ^ 0.5 * (1 – 0.2 * 0.2) ^ 0.5
= 0.99919967974
If you forced a rich person to play this same game of repeatedly betting 20% of their money on a coin flip they would also end up losing all their money! When you frame it like this it's obvious that having a poor person play an unfavored gambling game and deposit their losses to a rich person is going to favor the rich people. This doesn't seem like a critique on capitalism or inequality, it's more analogous gambling at a casino.
----
However I am still confused how you can have a game where the expected gain after a single match is 0%, but when playing multiple rounds your expected gain is negative (this is what plugging numbers into the expected value formula in the Kelly Criterion wiki seems to prove). I find this counterintuitive and hoping someone can explain this.
by notwokeno on 12/22/22, 3:29 PM
People don't like this but not only does it work well it's often more efficient in general.
by samoit on 12/22/22, 9:24 AM
by orionblastar on 12/22/22, 9:06 AM
by crimsoneer on 12/22/22, 9:18 AM