[spinchange]

The Yard sale model in this post demonstrates that rich people are not necessarily better at allocating capital even if/as they accumulate and compound it faster.

The military is NOT where most spending goes - most spending goes to the entitlement programs: social security and Medicare.

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It does not demonstrate that at all. It assumes everyone, rich and poor, is exactly equal at allocating capital because they all have a flat 50% chance to make money on every investment.

In reality some poor people are savvy investors and become rich and some rich people are foolish investors and become poor.

[matthewdgreen]

What it demonstrates is that people with equal investing skills will see radically unequal outcomes, based entirely on their pre-existing wealth. Presumably you could update this model to give some people “better investing skills” and others worse skills. (In practice you’d just bias the coin flip against the ‘worse’ investors.) I suspect that once inequality has crept into the game then even having “better investing skills” is outweighed by the advantage of being already-rich. But I haven’t run the simulation to see how much investing advantage gets wiped out by wealth inequality: seems like it would be a fun project to code up with my 15y/o.

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> What it demonstrates is that people with equal investing skills will see radically unequal outcomes, based entirely on their pre-existing wealth.

Well, duh. Did anyone think otherwise? Obviously a great investor with $1,000,000 will make more money than a great investor with $100. That's not some nefarious plot of evil capitalists to keep down the poors, it's just the math of how percentages work.

What system could possibly eliminate that advantage without destroying the incentive to invest at all? If you're managing a million dollars and you are unable to make any more money than you would investing $100, then why would you invest? What would people do with their money in that case? Hide it under a mattress?

[matthewdgreen]

TFA talks about all of this. The point of the article is that in a system with a finite amount of wealth, even a society that starts equal will eventually become highly unequal: as long as there is continued betting/competition where all parties have an equal risk tolerance corresponding to their income. The concentrating effects of these bets is the important lesson. TFA describes some ways to avoid this outcome.

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But TFA article is completely unrelated to the real world.

There is not a finite amount of wealth. People create new wealth through innovation.

People do not mindlessly continue the same investing strategy when incentives change. If you reduce the expected return from an investment, they stop investing in it.

So any strategies that might be useful for the contrived game described in the article are not relevant to the real world.

[matthewdgreen]

Nearly every economic action you take can be viewed as an investment or bet. Getting up in the morning and going to work represents a bet that your compensation will be worth the time spent. Sending your kids to school/college is an even more obvious example. For self-employed people all of this gets much more literal: every job involves a tradeoff of time and resources that could be spent on different projects. Even open-source hobby projects are can be a time-investment in building your resume. These "bets" have counterparties as well: for example, your employer can afford to negotiate much harder than you can on salary, because you need a job and health insurance more than they need you.

I also agree that this is a simplified model. But its simplicity is what makes it elegant: you can see the effect in a model that lacks all of the complexity of real-world economic activity. In the real world the "bets" are more complicated and the odds more variable, but you can't just claim "this effect must go away" without articulating a clear reason that it would.

The reasonable point you do make is that in our current economy the "pie" isn't fixed: new wealth is being created all the time, and this is one reason we don't collapse into permanent inequality the way this model does. This doesn't negate the model, however, it just means there is something counteracting it. Unfortunately the fear is that in the future (or perhaps even the present) new wealth creation will no longer keep up with this underlying concentrating effect, and we'd better think hard about what to do then.