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The Power of Statistics and Probability Analysis

Those who don't believe in statistics and probability analysis are typically the same ones who misuse them. Here are a couple of examples:

According to Albert Speer, Hitler’s Minister of Armaments and War Production, Hitler believed that he was a genius among geniuses. Apparently he wanted to document and record this “fact” for all time, and so he ordered that everyone on his inner staff be administered an IQ exam. When the results came back, Hitler was so furious about those results that he then ordered them summarily destroyed. Apparently mediocrity breeds mediocrity which further breeds megalomania.

Donald Trump (who also believes he is a genius) once stated that all those selected to appear on his Apprentice show had IQs greater than 200. But with the help of probability analysis and calculus, we find that given a standard deviation of 15, there is but one chance in 76,017,176,740 of anyone achieving that score. And given a world population of about 7.2 billion we may safely proclaim that nobody on this planet has an IQ of 200 or more. Again, we find the brain power of another self-proclaimed genius to be greatly exaggerated.

Back in my academic days I studied statistics and probability analysis. They became my research tools. I have relied heavily on them ever since. I say this, not in a boastful way, but to lend some credence to the validity of the numbers that show up in my essays on various subjects. I don’t make them up. And I studied under the toughest math professor known to man or beast (I actually made that up. But he was tough). He gave out damned few A’s, and I was one of his stars. Anyway, he liked me. Nerds of a feather apparently also flock together.

Now to the subject at hand. I have stated in several of my essays that approximately 96 percent of all wealth in America is inherited, directly or indirectly. Other economists have estimated that percentage to be in the 40 to 70 percent range. I don’t know how they arrived at their estimates, but I can tell you a lot about how I arrived at my own.

First, here is why this percentage is important. The higher this percentage, the lower your probability of ever achieving wealth apart from inheriting it. This conclusion flies in the face of assertions that this is the “land of opportunity,” and everyone has a chance in America to become a millionaire if only he or she puts his mind to it. My numbers support the opposite conclusion. I don’t want to pull the rug out from under anyone, but any realistic assessment of the opportunities to achieve wealth “from scratch” shows they are remote indeed. And whatever pathway you choose, it still must be lined with good luck. Your progress can be wiped out—again and again—by health issues, by unemployment issues, by divorce issues, by accidents, by rotten bastards on the job, and by a host of other hurdles. And with every set back, the odds shift against you simply because as you get older, your time runs shorter.

Approximately 3 percent of U.S. tax payers are millionaires. In order for that percentage to rise, those living in poverty must also increase. But we already have 47 million living in poverty. Not only is achieving millionaire status a very steep hill to climb, it must come with an even greater burden on the poor. And we also have the widest gap between rich and poor today.

Wealth is documented and recorded by the Federal Reserve Board in their Flow of Funds report, issued quarterly. They track the value of all major assets (mainly stocks, bonds, and real estate) and all major debts (mainly mortgages and bank loans). They report that 98 percent of all wealth is held by individuals, and 2 percent is held by churches, schools, and charities. This division is relatively constant over time. In order for those percentages to remain constant, both data sets must have proportionate flows of wealth into them. That means that market returns must be equal, and inheritance flows must be equal. And that further means that the average division of assets on death must be 98 percent to individuals and 2 percent to churches, schools, and charities.

In assessing when individuals die we find average life expectancies are about age 80, and the average age of their offspring and other beneficiaries to be about age 50. Thus the inheritance life cycle is about 30 years. Those who inherit do so at about age 50, and then they leave their estates to others 30 years later, and so on.

Further, all income flows to the benefit of our children, go to sustain their health, and to educate them, or they are in the form of gifts and loans (thus adding to their human capital—an indirect consequence of existing wealth). Thus the wealth that each of our children accumulates up to about age 50 is the direct or indirect consequence of our own wealth—even though they may want to believe otherwise. This picture becomes very clear when we think of royal families and the perpetuity of wealth within them. I will allow only 2 percent of their wealth to have been earned independently from all the money flows and income to them or to their benefit from their families. If you find that hard to believe, consider how much of Prince Charles’ wealth was earned by him, independently from all his family’s help. My guess: zero.

And so my probability analysis is quite simple: If 98 percent of all wealth is inherited, and then it becomes the source of additional wealth for 30 years, and that wealth is re-inherited, and so on in perpetuity, then the cross product of those percentages (in proportions) is equal to .98 times .98 = .96, or 96 percent of all wealth is inherited, directly or indirectly. That leaves but 4 percent of the total wealth pool that is created independently from inheritances. And that must come from creative persons and entrepreneurs with lots of skills and even more luck.

And so, good luck, good skill, and good creativity to all venture capitalists wherever you are! You will definitely need them.