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Übermacro models

October 10, 2012

Ricardo and Robert Fernholz have a new paper (PDF) about a model of theirs that shows how economic inequality occurs necessarily but the big winners win strictly by chance.  I say shows instead of proves, because I’ve literally only glanced at it.  James Kwak has read it.  He still doesn’t understand the details of the model, which is OK because it’s clearly complicated, but he summarizes the main argument for us.  (Thank you, James.)  I really like his conclusion:

Because we want to find order and meaning in the universe, we like to think that success is deserved, but it almost always comes with a healthy serving of luck. Bear that in mind the next time you hear some gazillionaire hedge fund manager or corporate CEO insisting that he knows how the country ought to be run.

There’s a lot of truth to the notion that success can go to your head.  The fact that someone has been successful doesn’t mean that they can be objective about themselves (cough Jack Welch cough).  I’ve been wondering lately whether the same phenomenon can occur with a successful society.  The amount of economic growth over the last five centuries has been nothing short of amazing.  How much of it is due to historical accident and how much is due to the inherent awesomeness of ourselves?

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