ACES VS DIAMONDS

The following comments from Takpandai is quite good; and hence I posted here in full for readers to enjoy, with my short comments at the end:

Good day, Dr. I have carefully analyzed your “deck of cards” model, but frankly speaking and in humble opinion I feel that it is rather inaccurate. I agree to your final points.. Education, smartness, hard working and other attributes are necessary for success, but I do not subscribe to the fact that “at the end of the day, final result is pure luck”. Allow me to present you another more complex, yet easier to understand model, combined with concepts such as outliers or Black Swan events.

Basically your/our whole idea of hard work, luck, draws, aces can be made into an analogy similar to the ecology system of say, the diamond mining industry. Let’s just assume the diamonds/aces here are business opportunities and starting conditions are such that everyone is educated and they know that diamonds exist out there. To become wealthy or rich (in reasonable terms) one must, of course mine the diamonds and sell them off for profit. A strictly competitive, free-for-all environment where hard working and smart folks will be meritly rewarded based on their efforts, which is one would find in economics books.

The main points I’m pointing out here are education and hard work. For, without education in the first place, no one would knew the existence of diamonds. Henceforth education is the primary and the most fundamental requirement in the quest of achieving financial freedom. Secondly hard work or determination/drive is needed so that one would physically go the mines itself and mine the ores themselves. Knowing about the existence of diamonds, but not physically mining them is basically 0% of achieving wealth.

Of course things would later become more complicated, such as setting up mining companies (political parties), establishment of cartels (state government) and creation of markets (gov policy), let it be monopoly, oligopoly etc. Mining companies, often motivated by greed and profit, would do whatever they to secure their diamond mines. Basically erecting entry barriers to their industry, be it physically (such as building fences) or by laws to discourage competition. Enterprising individuals who are locked out from this diamond rush, will have no choice but to move elsewhere and discover other diamond mines. That’s where entrepreneurship shines. On the other hand those who have the privilege to work in the mines would soon become comfortable and complacent, as they will enjoy comfortable profit while having their rights being protected by their “Masters”. They will have no incentive to move out and discover new diamond mines.. why the hard work when their Masters will manage for them (or so)? The complacency doesn’t just stop here. Their descendants, upon realizing such economic benefits bestowed to them by their Masters, may start conjuring the false illusion that their “Masters” could feed them for the rest of their lives.. basically by giving them free diamonds without the need to work.

So do you see the cancer that’s growing here? They start small but eventually multiply exponentially.. and ending up killing the hosts. The solution? I’m not sure though, since I’m not an expert in medical field (though I read medical stuff). Giving free advice is a health hazard nowadays. The best thing to do is to consult an oncologist I think. And back to the sorry tale of those being left out (or so it seems), may God bless them in finding other undiscovered diamond mines, or if they decide to give up they can always venture into other fields such as crop planting or sheep breeding. Their chances of achieving something big is always higher than the complacent group, because they know that the odds are always stacked against them. To them it doesn’t really matter how many cards are there.. as long as they attempt to “draw”.. they will always be a chance of getting an Ace. A fate that is much better than say, having a small deck of cards but NOT drawing at all (like the protected group). “The “probability curve” of life in actuality is even more complicated than the one that I have presented; it is highly non-uniform and asymmetrical”.. I have to agree, and it has to be this way, assuming if there were any “bell shapes” in the first place.

In my opinion the naturally occurring normal bell curve that many scientists notice when conducting experiments should in fact be kept and locked in the lab. Especially when it comes to wealth creation where it is dominated by outliers and black swans, which are always excluded from the curve itself. The normal curve is most noticeable in naturally occurring phenomena, such as the movement of particles (brownian motion) or the popular dice roll trials. Atoms are without brains and their movements are singularly dictated by physics laws. Humans on the other hand, make both informed and un-informed decisions, can become irrational, make mistakes etc.. and they do not bounce off randomly like what atoms do.

We have to accept the fact that outliers and other black swan events occur naturally, be it positive or negative ones. Anomalies always occur, such as a random program crash in computer, an unpredicted tsunami, earthquake, volcanic erruption etc. Even in cosmology for example, scientists are still unable to explain the inner workings of black holes which to me are of great mystery (ability to pull light itself, stopping of time at the event horizon, it’s immeasurable density etc) and the laws of psychics basically breaks down there.

In my opinion, the creation of billionaires like Li Ka Shing, Lim Goh Thong, Soros, Buffett, Mokthar, Bill Gates and the likes are basically outliers (entrepreneurs) who are taking advantage of black swan events (property crash, share market crash, invention of Internet, monopoly licenses etc). These people generally educated, expert in their field and have strong business acumen. And of course plenty of hard work. Can you name me one of them who are lazy? LKS may be manipulative in the sense that he basically controls all the property in HK now, but remember that during 1967s riots were happening in HK and many people fled leaving the property prices plunge. He foresaw that such event would only be temporary and took the risk and purchased the land parcels. And the rest is history. Similar story for Soros as well, whereby he shorted the pound when he predicted that the UK pound must devalue in the case of England withdrawing from the European Exchange Rate Mechanism. All of these anomalies are possible because they the fundamental flaws of capitalism.

Great wealth can be generated and destroyed as well. It’s a net zero sum game, perhaps. Just like the futures. Ah.. the folly of men and the corruption of greed. As long as greed exists, humans civilizations would forever engage in wars and commit atrocities. Even now as we are speaking. But it should not be viewed from a negative perspective only, for such adversities will allow the true power of the human spirit to manifest itself and overcome all aspects of odds stacked against him. Perhaps this is truly a great gift from God.

My comments:

Since human life is not a hard core science, we can look at it from many angles. There is no hard and fast way to model human occurence and behavior. My “deck of cards” and “Aces” example is to show the random nature of life and fate. While the “diamond mining” example above come from “opportunity” point of view.

To see an example of how randomness and luck, you can read Daniel Yergin’s book, “The Prize” – which is about the beginnings of oil industry where the great figures of oil, namely Rockefeller, the Nobels, Shell Royal Dutch – started: it was a combination of luck, hardwork, manipulation and strategy. But it also can be seen from the oppotunity and far sightedness point of view – whereby these early people took the gamble, were quite smart, work extremely hard and created a vision – that eventually paid offs.

What I am trying to explain is at the basic level of human beings – that is when you are starting with zero and not knowing what you will do in life and whether you will succeed or fail (this is true for young people who are just entering the business world – regardless of your race). You are stacked with a 1000 pieces cards in front of you (unless you are a son of a billionaire), how would you work your way smartly so that as time goes by you reduce your stack of cards to a manageable level, so that “luck” will be in your favor. If you find the right opportunity, then how can you ensure that you play the game in the most smart and efficient manner – so that you will increase your chances of getting an Ace.

But does that mean that even if you got less than an Ace, say a Ten,  you are a loser? Thats not necessary the case; it is just you get something less than optimum. So it is not a zero sum game and hence do not be discouraged. For some an Ace is achieving what he targeted for, which can be quite modest, while for others may be an Ace is by being a multi-millionaire. In another words, the finality of things will depend a lot on your own perspectives of what you want.


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