In The Success Equation Michael J. Mauboussin teased apart the relative roles of skill and luck in performance and introduced the paradox of skill: “As skill improves,” he wrote, “performance becomes more consistent, and therefore luck becomes more important.” (p. 53) And, addressing a gathering of investors, James Simons of Renaissance Technologies claimed that “luck is largely responsible for my reputation for genius. I don’t walk into the office in the morning and say ‘Am I smart today?’ I walk in and wonder, ‘Am I lucky today?’” He has, of course, been both incredibly talented and “lucky” in spades.
The reality is that being talented and hardworking is not enough to guarantee success; luck also plays a critical role. Robert H. Frank, an economics professor at Cornell, expands on this point and explores its ramifications for tax policy in Success and Luck: Good Fortune and the Myth of Meritocracy (Princeton University Press, 2016).
“Chance events,” the author writes, “have always mattered, of course, but in some respects they’ve grown more important in recent decades. One reason for that has been the spread and intensification of … winner-take-all markets. These markets often arise when technology enables the most gifted performers in an arena to extend their reach.” (p. 9) In what might be viewed as a variation on Mauboussin’s paradox of skill, Frank argues that “the prodigious rewards that accrue to a handful of winners in these markets attract enormous numbers of contestants. And the more [highly competitive] contestants there are, the more luck matters.” (p. 10)
High achievers often downplay the role of luck in explaining their success. They’ll claim that they deserve what they achieved (and all the money that comes with it) because they were both skilled and dedicated, unlike their less talented, less driven colleagues. They’re right only in part. As the author argued in an earlier book,
“a gifted salesperson … will be far more productive if her assignment is to sell financial securities to sovereign wealth funds than if she’s selling children’s shoes.” (p. 41)
Psychologically, however, denying luck’s role in success may be a good strategy since it “may spur additional effort.” (p. 77)
Frank believes that a recognition of the pivotal role of luck in success will help to break down the resistance to raising more tax revenue to
“sustain the public investment needed to support the stock of luck available to future generations,” a resistance that “has also resulted in spending patterns that poorly serve the current generation, including even its most successful members.” (p. 108)
Frank advocates a progressive consumption tax. A person’s taxable consumption would be his income minus his savings.
“Under the current income tax, rates can’t rise too high without choking off savings and investment. But higher marginal tax rates on consumption would actually encourage savings and investment.” (p. 118)
Since our sense of financial well-being is relative,
“doing better than one’s rivals,” “a progressive consumption tax wouldn’t alter the fact that those who earn more can also spend more.” (p. 121)
They might forgo some extravagances, but so would their rivals. So they shouldn’t feel worse off.
Whether or not one buys into Frank’s proposal for a federal consumption tax, this book should stimulate debate. And that’s all one can ask, given the current situation in Washington.