Are Rich People Smarter?

Shiki Moshe Levy

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: We investigate general models of wealth accumulation induced by financial investment. These models assume only that returns are stochastic and that a minimal level of wealth is required in order to participate in financial investments. When homogenous investment talents are assumed by the generated distribution of wealth converges to the Pareto (power-law) distribution of wealth which is empirically observed at the high-wealth range. However, when a small degree of diversity of investment capabilities is introduced, the resulting distribution of wealth becomes inconsistent with the empirical distribution. We conclude that the empirical Pareto wealth distribution suggests that chance, rather than 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 desirability of social inequality.

Date: 1997-10-07
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