Class status matters more for success than performance

9781400067930Though Nassim Taleb is more well known for The Black Swan, I actually liked his earlier book Fooled by Randomness, better. It seemed aimed toward more general issues than The Black Swan.

One of Taleb’s hobby-horses in Fooled by Randomness is that the book The Millionaire Next Door was based on faulty inferences, and misleading many people. This was back in the heady days before the property bust, so many middle class individuals were investing in the “can’t miss” and eternally appreciating real estate bubble. In any case, The Millionaire Next Door had a simple strategy: observe the characteristics of millionaires, and so gain insight into what might make you a millionaire. The problem pointed out by Taleb is that the sample set is highly biased; you see all the millionaires with the characteristics of interest, but not the more numerous non-millionaires. One of the major variables, perhaps the major variable, in becoming a millionaire is what we’d all luck. There may be many necessary conditions, but luck is one we can’t cultivate. One might increase the chance that one is a millionaire…but The Millionaire Next Door misled many people into thinking that just by doing what millionaires had done any person could become on themselves.

So consider this from The Wall Street Journal, Best-Paid CEOs Run Some of Worst-Performing Companies:

The analysis, from corporate-governance research firm MSCI, examined the pay of some 800 CEOs at 429 large and midsize U.S. companies during the decade ending in 2014, and also looked at the total shareholder return of the companies during the same period.

MSCI found that $100 invested in the 20% of companies with the highest-paid CEOs would have grown to $265 over 10 years. The same amount invested in the companies with the lowest-paid CEOs would have grown to $367. The report is expected to be released as early as Monday.

The original report is also online. There are other studies which support this conclusion. The correlation between CEO pay and firm performance is relatively weak to non-existent.

Does this mean CEOs are worthless? Not necessarily. There’s some range constriction going on. The average person on the street wouldn’t have the minimum necessary skills and aptitudes to be a CEO of a large firm. But the variation among CEOs in pay might be due to a whole different set of skills than the characteristics which constrain the set of individuals who might become CEOs. For example, the average CEO might be far more conscientious and intelligent than the average person. But, it may be that the less conscientious CEOs actually get paid more. And then of course there is luck in falling into a good board situation, which anchors you to a particular set point in terms of future salary expectations. And the outcome of a firm may have only the most marginal relationship to the CEO performance (consider how we attribute macroeconomic performance to American presidents, when they probably have only marginal influence on the business cycle).

And once you make it into a particular class, social connections can help prevent you from sliding back down. To a great extent the same of Yahoo to Verizon is a failure for Marissa Mayer. But she’ll be fine, and obtain another CEO position if she so chooses. If she had turned around Yahoo, always a long shot, she would have been dubbed a genius. As it is, she’ll get a golden parachute and look to future opportunities.

What’s the take-home less? Social mobility is a thing in the United States. But the reality is that what you really need to do is somehow make it into a particular segment of the class structure. Once you are there, the reality is that your own competence probably matters less than chance and necessity. Even if you don’t become a superstar, the nature of the American class structure will probably make it so you’ll be shielded from the bracing consequences of creative destruction.

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