The Fair Reward Problem: The Illusion of Success and How to Solve It

Didier Sornette, Spencer Wheatley and Peter Cauwels
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Didier Sornette: ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute
Spencer Wheatley: ETH Zurich
Peter Cauwels: ETH Zurich; Director Quaerens CommV

No 19-25, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Humanity has been fascinated by the pursuit of fortune since time immemorial, and many successful outcomes benefit from strokes of luck. But success is subject to complexity, uncertainty, and change – and at times becoming increasingly unequally distributed. This leads to tension and confusion over to what extent people actually get what they deserve (i.e., fairness/meritocracy). Moreover, in many fields, humans are over-confident and pervasively confuse luck for skill (I win, it’s skill; I lose, it’s bad luck). In some fields, there is too much risk-taking; in others, not enough. Where success derives in large part from luck – and especially where bailouts skew the incentives (heads, I win; tails, you lose) – it follows that luck is rewarded too much. This incentivizes a culture of gambling, while downplaying the importance of productive effort. And, short term success is often rewarded, irrespective, and potentially at the detriment, of the long-term system fitness. However, much success is truly meritocratic, and the problem is to discern and reward based on merit. We call this the fair reward problem. To address this, we propose three different measures to assess merit: (i) raw outcome; (ii) risk-adjusted outcome, and (iii) prospective. We emphasize the need, in many cases, for the deductive prospective approach, which considers the potential of a system to adapt and mutate in novel futures. This is formalized within an evolutionary system, comprised of five processes, inter alia handling the exploration-exploitation trade-off. Several human endeavors – including finance, politics, and science – are analyzed through these lenses, and concrete solutions are proposed to support a prosperous and meritocratic society.

Keywords: success; reward; luck; merit; measurement; scenario analysis; Darwinian; evolutionary learning; equality (search for similar items in EconPapers)
JEL-codes: A13 C12 C18 D39 D63 D8 G10 H30 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2019-04, Revised 2019-04
New Economics Papers: this item is included in nep-hme and nep-hpe
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1925

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