(originally published 9/8/2016 on my personal LinkedIn page)

Last month, in “How American Idol Undermines Our Future”, we compared two different methods of reaching a goal. One involved having a plan and the discipline to execute on it, and the other involved winning a lottery of sorts. It seems that, all things being equal, one would chose to reach their desired outcome without having worked for it. What if all things were not equal though? What if the outcome that one reaches through the disciplined execution of a well-designed plan is measurably better than the outcome achieved by having been lucky? A recent paper by Oleg Chuprinin and Denis Sosyura seems to indicate exactly that. 

Having been born into a wealthy family is certainly not indicative of a superior ability to manage money. In fact, a review of this article reminds us that those who inherit a great sum are often quite proficient at losing it.  By studying the family histories of over 250 U.S. money managers, Chuprinin and Sosyura found that managers from poor families tend to deliver measurably higher risk-adjusted returns than managers from rich families. It seems that an inherited advantage may have developed into a handicap of sorts.

A series of behavioral studies conducted at the UC Berkeley campus involved giving an unfair advantage to randomly selected players in games of Monopoly. These included upfront advantages, like receiving twice as much starting money, as well as recurring perks like higher ongoing bonuses for passing “Go”. While there were many interesting outcomes of these experiments (You can see a TED talk about them here), the one that caught my attention was when one “advantaged” player explained the strategies that he employed to win the game. Throughout the course of playing, he became blind to the existence of his clear upper hand.
The paper by Chuprinin and Sosyura states that the money managers who were “born poor” may be more successful than their peers as a function of their disadvantages. There is evidence that managers from wealthier families have an easier time not only getting into the investments business, but also being promoted through the ranks. Because of this, those who begin from a lesser status needed to exhibit better results to enjoy the same career paths. Whether the barriers acted as a filter or a training ground, the result is that the managers born into the bottom fifth in family wealth achieve annual fund returns over 2% better than those born into the top fifth.

Perhaps the most intriguing part of this study was in the final paragraph, where the researchers extend their findings outside the realm of asset management. Their evidence suggests that similar results may exist in areas such as corporate management and professional services.

The Journal of Human Resources indicates that since the 1980s, it has become more and more difficult for an American to move to a higher economic level in their lifetime. Facing that kind of information, and an onslaught of discouraging media, it is no wonder that millions of people would decide play the lottery! It may become easy to believe that your only shot is a long shot. 

I work with people every day that stand as living proof that you don’t need to be one of a lucky few of society’s winners. They demonstrate that a solid plan, hard work, and good habits can take a person of any background and see them enjoy a dream life. I am glad to have found evidence that those who worked for their outcomes might even enjoy a greater version of success than those who didn’t.