Is the System Rigged? By Brad Thomason, CPA
When people do not get the results they are after, they go looking for reasons. Often, the tendency is to find someone to blame for the unfavorable outcome.
In financial matters, we see a couple of versions of this. Sometimes it’s in the form of people who think “rich people” got their money through some mechanism that’s not widely available to the general public. Sometimes it’s in the form of one group of investors claiming some other group has an advantage in the form of preferential access to information or the ability to get their orders filled faster.
In both instances, somebody did something to give themselves an upper hand. There is an unfair advantage that was put in place, on purpose. The other guys rigged the system for their own benefit. That’s the charge.
Well, I’m sure that there have been instances where things like that have happened. Michael Lewis would have a whole lot less material for books if they were pure myth. But there’s a much simpler explanation for why there can be disparities in financial outcomes, one which is far less sinister than some have assumed. It’s something that mathematicians have known about for centuries, yet it somehow fails to get noticed in our society’s collective conscience.
How could that be possible? Well, a long time ago higher education was different than it is today. Today, the line between college education and vocational training is very hazy: most people go to college because they want to get a better job. But it didn’t used to be that way. Back in say Newton’s day, for instance, people went to college so that they could be made aware of what humanity had already learned. The loose philosophy went like this: we’ll teach you what other people have already figured out so that you have a general awareness of how things are, and also so you don’t waste your time wondering about problems that already have solutions. The implication was that educated students could then devote themselves to new matters and unanswered questions, and in so doing spend their time and energy adding to the “table of knowledge.”
We know a lot of things that Newton and his contemporaries did not. But interestingly, there are things that were known to scholars-past which we in the modern world have very little knowledge of. Because we only spend a limited amount of time educating our students about old discoveries, many of them fall out of usage despite still being just as important as they ever were. One of these is a set of related principles in mathematics known collectively as the Gambler’s Ruin.
The various aspects of the Gambler’s Ruin cover how to establish expectations about the outcomes in games of chance and other situations where the exact conclusion is not pre-set. One of the conclusions is that the player with the largest chip stack usually wins in the long-term. Let the implications of that sink in for just a minute.
Do the rich get richer? Often. Why? Because they have the larger chip stacks. In fact, at base, that’s what wealth is: resources in excess of what you immediately need.
When someone can deploy capital as an investment, instead of spending it on necessities, they will get even further ahead if the investment is successful. And if they repeat it, the effect only increases the further into the future they go.
The implication of the word “rigged” is that someone did something to change what was going to happen. I would argue that no such rigging is required. There is already a naturally occurring (for lack of a better term) mechanism which allows those who get a small advantage to turn it into a big advantage. Lack of knowledge about this long-known mathematical tendency, and in fact a misunderstanding about the nature of wealth itself, causes many to go looking for smoking guns where none need to exist. You can explain the existence of wealth, even great wealth, without there being any tampering by the bad guys.
Colleges aren’t going to change curricula anytime soon. Students aren’t going to start digging –en masse – through the annals of history to find out what else they haven’t been taught. Politicians looking for votes aren’t going to stop vilifying fat cats. Nor are people who need someone else to blame for their disappointments going to stop looking for scapegoats.
But wise investors can gain a benefit from getting to know the ins and outs of money a little better. By understanding what the mechanisms are which drive the growth of capital, investors put themselves in a better position to participate. If the math favors those who get a few extra chips, then isn’t it worth a little time to figure out how to be one of those players? If you already do have a few extra chips, isn’t it nice to know that you have an advantage? Not because you or anybody else did anything to unfairly tilt the odds in your favor, but because that’s just how the math works on these things.
And if you don’t have any extra chips, I think the news is still good. If you think that there are forces working against you to keep you down, you may not even bother to try. On the other hand, if you understand that you have the same access to this mechanism as anyone else, you might decide to approach things differently. Those who are not participating today would probably be better served by figuring out how to join the club at some later date, than looking for reasons to hate those who are already in the club.
Because when you get right down to it, getting angry with someone for participating in something that you could be participating in yourself isn’t just counter-productive. It’s not really very reasonable, either.