Question: Are Rich People Smarter?

by James & Miel on November 19, 2009 · 0 comments

Answer: No.

According to research by Moshe Levy published in 2002 in the Journal of Economic Theory:

We formulate a general stochastic process of wealth accumulation by capital investment and analyze the conditions required to ensure convergence to the empirically observed Pareto wealth distribution. While homogeneous investment talent leads to the Pareto distribution under very general conditions, even a mild degree of differential investment talent results in a non-Pareto wealth distribution. This finding suggests that chance, rather than differential investment talent, is the dominant factor in the process of wealth accumulation by financial investment. Our findings conform with market efficiency and may have implications regarding the origins, the economic significance, and the social desirability of wealth inequality at the high-wealth range.

In plain English, rich people are rich because of dumb luck, not because of investing smarts – at least as it pertains to stocks.

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