Here's a situation you may find familiar: Your next-door neighbor is a dork, but he earns more money than you.
This makes you ponder how people with microscopic intellects can end up on top in the race to a higher standard of living.
It's worth examining the question as MACHINE DESIGN unveils the results of its annual engineering salary survey. Such musings are natural. Psychologists have found that people prefer to make $70,000 living near neighbors making $60,000, rather than be an $80,000 household in an area where $90,000 is the norm. But the larger question is whether income is a measure of a person's abilities.
The answer seems to be: Only sometimes. Insight on the subject of personal wealth comes from the field of simulation. A growing body of knowledge suggests winning track records in business owe as much to blind luck and chance as to abilities. And some professions that only seem moderately lucrative are, in fact, quite desirable when viewed probabilistically.
To see what I mean, consider an example inspired by New York University Adjunct Professor Nassim Taleb. Suppose your professional life was somehow rewound and played back numerous times so you relived it repeatedly in a manner reminiscent of a Star Trek episode.
Because most engineers make conservative choices professionally, a great many of the outcomes cluster in the same general area. Relatively few of these alternate lifetimes will be affected by stupendous cases of good or bad luck that will put you in a mansion or on skid row. This tendency to cluster would lead Taleb to say that, in expectation, an engineering career is more valuable than that of a real-estate speculator, rock musician, or restaurant owner, even if a few such individuals strike it rich.
Now consider your neighbor who is more lucky than smart. Repeated rewinds of his professional life produce economic outcomes that are all over the map. If he had to relive his life a million times, many of his biographies would have him selling fake Rolex watches out of the trunk of his Chrysler K car. Only in a few possible outcomes does he end up as your neighbor and a Lexus owner.
There is empirical research that suggests Taleb might be right about randomness and personal income. It turns out that the number of people having a net worth of a billion dollars is about one-fourth that of those worth a half billion. Four times more people again are worth a quarter billion. And the relationship repeats as the economic sums diminish. Researchers say it holds for virtually every country on the planet, regardless of economic system or government policies.
The term "power law " is used to describe this simple relationship. But power laws are indicative of systems prone to sudden and unpredictable changes where randomness leads to instability. The severity of avalanches and earthquakes follow power laws, for example. Small wonder, then, the same kind of relationship holds for net worth in a world filled with economic upheaval.