Do you need to be smart to be rich? Or is it pure luck?
As it turns out the truth might have nothing to do with either. Let's find out why.
Are the rich just lucky?
It's a common trope that to be rich requires more than a little luck, but is this true? A team of researchers at the University of Catania in Italy certainly believe so.
The team, led by Alessandro Pluchino created a computer model of "human talent" and ran it for 40 years (not in real-time of course) to try and predict which of the virtual population would become the most successful. Another important factor in the model was an element of fortune and misfortune that can make or break the individuals' success.
"Pluchino and co’s model is straightforward. It consists of N people, each with a certain level of talent (skill, intelligence, ability, and so on). This talent is distributed normally around some average level, with some standard deviation. So, some people are more talented than average and some are less so, but nobody is orders of magnitude more talented than anybody else." - Technology Review.
Their results were quite surprising. The simulation was able to produce a distribution similar to that seen in the real world; 80:20. That is, 20% of the population has around 80% of the world's wealth.
The model, therefore, in the team's view, predicts that luck is more important than talent or IQ for determining someone's success in the world.
But the study raises some interesting questions and concerns about its objectivity:
- Was the model built to prove their presuppositions, i.e. luck is the only reason people become rich?
- How did they define luck and model it, and how much emphasis was placed on this?
- Has the team fundamentally misunderstood the Pareto Principle (80:20 rule)?
- Do individuals keep trying if they experience "bad luck" or do they simply give up?
Many successful people tend to live by the rule "you make your own luck." According to them, the more risks you take, the more hours you work, the more chances you have for being "lucky."
Many successful businessmen will make many mistakes and have "bad luck" throughout their careers. But the very wealthy will "take it on the chin" and try again.
They do not fear failure. Rather, they embrace it as a learning and growing experience.
"Fail and fail fast" is usually the advice they'll give you.
Of course, many individuals are dealt with different hands at birth that can either help or hinder them in later life. Not to mention the quality of your childhood, the influence and experience of your parents, and the knowledge of your teachers throughout your formative years.
If you happen to be born in one of the wealthiest nations of the world, or particularly wealthy families within that country, this gives you an immediate boost over someone born in the developing world. They are, in a sense, "lucky".
But that doesn't always guarantee success or failure for that matter. People can, and often do, fail to succeed in many rich countries around the world.
There are many rags to riches stories from around the world. But how did they manage it? Were they simply "luckier"?
But is that their fault? How much control do you really have over your life anyway?
But let's not stray off the primary topic of this article by diving deeper into the world of psychology and philosophy.
Do you have to be smart to be rich?
You may well assume that being smart will put you in a good place to succeed. While it can certainly help, being smart alone is usually not enough.
Being smart has nothing to do with being lucky, and facing constant failure due to lack of luck can crumble even the smartest of people.
Amassing wealth over your lifetime will take a tremendous amount of hard work, grit, and determination. But there is also some scientific evidence to back up this timeless advice.
A 2016 study published in the Proceedings of the National Academy of Science showed that financial success and high innate intelligence have a very poor correlation.
"A December 2016 article in Bloomberg cited one of the co-authors of the study, economist James Heckman. When he asks how much of the difference between people's incomes can be tied to their IQs, most people guess between 25% and 50%. The actual number is about one or two percent." - Forbes.
Personality, like grit, hard work, and determination, is far more important. For example, the Bloomberg article noted that working hard to pass exams, rather than walking them thanks to a high IQ, was a better predictor for later financial success.
So what's the moral of the story here? If you want to be successful you need to work and think like the rich. But, if you merely copy someone else's recipe for success, you may find that the same recipe doesn't apply to you. Instead, the far better alternative is to pick up the best and most impressive traits of successful people and try to add them to your skillset.
You may not become a billionaire or millionaire for that matter, but learning about how they did it, both from their success and failure, will certainly improve your life beyond all recognition.
There are many fantastic self-help books out there on just this subject.
You can read about your favorite successful businessmen, like the rags to riches story of Lord Alan Sugar, or read from those who have studied the rich and successful like Tony Robbins (Money Master The Game), Robert Kiyosaki (Rich Dad, Poor Dad) or Benjamin Graham (The Intelligent Investor) among many others.
By reading about successful people and implementing the lessons you learned from their success, some of their "luck" (that they made themselves) might rub off on you.
You will quickly gain an appreciation for how hard work, and creating value (no matter how small) to the world will help you succeed in life and in the pocket. You will also accelerate your own personal financial IQ and learn the rules of the money game.
But, in a nutshell, the rich get rich by creating something people want more than their money. The vast majority also don't work for money, they solve problems for other people.
Money is just a nice bonus.
Why aren’t economists rich?
Since the main theme of this article is the perceived link between intelligence and wealth, it invites the question "why aren't economists rich?" They dedicate their lives to the study of the intricacies of economics and worldwide markets and most are very intelligent individuals.
Since they are, in theory, experts in money, and smart, why are they not killing it on the stock market or in financial life?
While there certainly have been some very rich and wealthy economists in the past (like David Ricardo), most appear to middling it at best. In fact, many of the ultra-wealthy, like Warren Buffet, have little time (to put it mildly) for their financial predictions and advice.
“I don’t pay any attention to what economists say, frankly,” Buffett told CNBC. “Well, think about it. You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No.”
Buffett also gave the example of one of the most influential economists of the last century, John Maynard Keynes. He made enormous losses trading currencies and stocks in the 20s and 30s at a time that Buffett began to make his own personal fortune.
Though he did make back a lot of money when he switched to a value investing strategy (as Buffett did after learning from Benjamin Graham) afterward.
The vast majority of them, like Keynes, has failed every time to predict major economic crashes throughout history. Since this is their trade, they should be best placed to warn of impending doom.
The reason? Because they do not live in the real world. Their field of study is highly theoretical and detached from the real workings of economies, they are, quite literally, blinded by science.
They merely study money, they do not create it.
"They are often encouraged to oversimplify variables in order to make models work. This works for academia, but investors often find that the devil is in the details." - Investopedia.