Business

Success, Luck and Overhauling the Tax System

Robert H. Frank is a professor of economics at Cornell University. In his new book, Success and Luck: Good Fortune and the Myth of Meritocracy, Frank explores the role of luck in success, in the process making some noteworthy observations. Then the book gets into its real agenda: a proposal for the overhaul of the tax system.

How much of success is due to luck?

Success requires hard work and dedication. But it can depend on luck too.

Frank argues that luck plays a larger role in success than most people are willing to acknowledge, especially most successful people.

People who are successful are often described as risk-takers. Being a risk-taker means deliberately engaging in an endeavour whose result is partially determined by chance. Therefore, successful risk-takers are by definition lucky risk-takers. Those who did not succeed may have merited the success by any other measure, but they were unlucky risk-takers.

Nevertheless, many, as Frank notes, seem uncomfortable with the possibility that success in the marketplace depends to any significant extent on luck. Frank even shows, using a valid statistical mathematical argument[1], that the more well-qualified competitors there are for a particular perk – even if the luck component in the result is small – the more likely it is that the winner will be the most lucky, not the best-qualified. Thus, the winner may be very well-qualified, but others who are equally or more well-qualified will not have won.

However, Frank believes the unwillingness to acknowledge the importance of luck may actually be helpful to success. If you believed that success is largely a matter of luck, you might be less motivated to work hard, expecting luck to play a determinative role anyway.

Parents who teach their children that luck doesn’t matter, says Frank, may for that very reason be more likely to raise successful children than parents who tell their children the truth.

The “positional goods” tax bracket

From his discussion of the role of luck in success, Frank makes a not very seamless transition to another topic, one that is presumably related, but rather tenuously.

Frank notes that the average American wedding now costs more than $30,000, almost three times as much as in 1980. The median new house, he says, is now 50% larger than in 1980, even though median income has grown only slightly in real terms.

How big should a house be? How much should a wedding cost? “Orthodox economic theories assume, preposterously,” says Frank, “that our answers are completely context-free. Yet all available evidence indicates that people find it impossible even to think about such questions without a suitable frame of reference.”

In other words, people find it difficult to answer such questions without knowing, how big is my neighbor’s house? How much did my neighbors spend on their daughter’s wedding? The cost and value of such “positional goods” is a function of how I stand relative to my peer group.

How does this relate to success and luck? Frank does not state it. But presumably the value of people’s “positional goods” is related to the “preening rights” they claim as a result of their successes. The visible value of the positional goods buries forever the role of luck in achieving that success.

The highly variable value of positional goods

Frank then tries to demonstrate how malleable the value of these positional goods is. When young, he was a Peace Corps volunteer in Nepal. He lived in a two-room house with no electricity or plumbing. “If I lived in that same house in the United States, my children would have been ashamed to invite friends over. Yet in Nepal it was a completely satisfactory house… If my Nepalese friends could see my house in Ithaca, New York, they’d think I’d taken leave of my senses. They’d wonder why anyone would need such a grand home. Why so many bathrooms? But most Americans don’t think that. That’s because our evaluations depend so heavily on what’s nearby.”

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