Kjetil K. Haugen∗ Faculty of Logistics

Molde University College, Specialized University in Logistics, Molde, Norway Kjetil.Haugen@himolde.no, Phone: +47-99456006

July 31, 2015

Abstract

In this short note, I address the question many of us have had a “YES-feeling” about all our lives. Does getting stinking rich implicate wisdom, or might it be the other way around? Or, may wisdom have no causality to the concept at all? Hopefully, through relatively easy arguments, I will try to persuade the reader to believe – as I do – that one must be really stupid to get really rich.

Keywords: CAPM, Wealth, Stupidity, Risk

1 Introduction

It is hard today, with all the information floating freely around the internet, not to observe the extent of stupidity said or written by rich people. All these silly stories on the correct decisions at the right time are boring me constantly. Not to speak about all these silly political statements, which by themselves are strong empirical indications on truthfulness of the title of this note. If other (not so silly) but still perhaps not so very wise internet surfers read these stories and actually believe them, this information is not only boring, but maybe even dangerous.

2 How to get really rich

I will try to argue why stupidity is a necessary condition to get rich[1] by starting to address the obvious question: How does one get rich? Apart form the obvious explanations of heritage or sheer luck, one is often presented with explanations involving; hard work, determination, decisive power and so on. As the intelligent reader probably has understood, I do not buy such explanations.

In order to get rich, it is necessary to take risk. And, in order get really rich one has to take really big risks. Why is this? Financial theory may be helpful here, at least at a somewhat philosophical stage. Before I dig loosely into necessary economical theory, let me make the following clear. My meaning of getting rich here is not heritage- or lottery-luck-rich, but either by applying financial and/or human resources to invest; making an end wealth, not only larger than the starting point, but very much larger than the starting point. Hence, my definition of getting rich is making your start-up resources grow, and grow much. Perhaps the term “noveau riche” is covering the individuals I will discuss here.

[1] I should perhaps be slightly clearer on my definition of richness. In this text, a convenient definition could be: If your wealth is so high that it is the only reason for entering media, then you are rich.

3 A little economic theory

So, what has financial theory to offer? One celebrated part of this somewhat dull part of economic theory is named the CAPM model [5], [6], [7], [4], [3]. Roughly speaking, what this model tells you, is that in order to achieve returns of the insecure type, one has to take risk by investing in uncertain financial objects like bonds, warrants, options or shares to name a few of this nifty financial instruments. One could be on the safe side and put the money in the bank, or alternatively take risk and invest the money into less safe harbors. The theory then goes on: In order to make (presumably risk averse) individuals take such risk, they must be paid a risk premium. This risk premium secures that in the long run, investors are better off (on average) than the more risk avers bank-savers.

4 The silliness of wealth

This seems to make sense, does it not? In order to earn more money, one has to take risk. After all, if one could make a fortune safely, then everybody would be rich. We are all (very well) aware of the fact that everybody is not rich. As such, this seems like a sensible way of thinking. Take no risks and stay poor, or take risk and get rich. This is all good, my point is however slightly further along this line. The obvious continuation of this argument is then: In order to get really stinking rich, really big risks are necessary to take. Such risks could involve putting all your starting wealth into a single financial commodity, starting you own firm, or deciding to become the best football player in the world at the age of 5. These are all legal decisions. We can of course also look at some illegal options; for example robbing the Bank of England or buying a ton of heroine. Both options could offer substantial profits, but perhaps at unacceptable risks.

There are people making wise decisions investing in portfolios or doing their homework at the same time as training extensively to become the world’s best selling author. None of these characters win the big prize of the investment lottery. Such prizes are reserved for the significantly more silly individuals going all the way for the maximal price at a minimal probability.

To reach the level of Messi or Ronaldo, doing your maths is perhaps not a wise strategy. At the same time, the new Messi is perhaps already born, but how a silly character he is. Still, he will emerge out of nowhere mesmerizing future global football audiences with his magnificent play.

My argument is actually very simple. In order to become really wealthy, on must take unacceptable risk – or be silly or stupid or whatever one likes to name it. Nobody has ever become the richest man in the world by going along with the sensible majority, has he?

An alternative way of thinking on these matters could perhaps be: We’re all involved in the big richness lottery. A limited amount of persons will win the big prize (getting really rich). In order to affect the chances to win we can make a lot of risky decisions. But, in order to have a reasonable chance to win, we must make crazy decisions. Still, only a tiny fraction of those who make these stupid decisions will win – they must be the most stupid of all – or not?

As many of my examples are from the entertainment industry, some readers may be mislead into believing that one needs to be a football player or rock star to get stupidly rich. This is by no means the case. Think about the investors above (and do not forget that richness in this context is far more than the salary of the average CEO) who make profits from investing in uncertain securities. Surely, one could make a reasonable fortune grow faster than the average by well-hedged investments in the financial market. However, unless the starting fortune is insanely high, such a (wise) strategy would not lead to the kind of richness we talk about here. In order to reach such levels, one has to make stupid investment decisions – involving going for unreasonable risk. If one of a million technological options will prove to be the successful one, hitting it may be hard, leaving 999999 fools behind but still one stinking rich. This “winner” gets the prize, but does not prove intelligence. After all, he went for a very unlikely and unmistakable silly investment option.

5 Social implications and conclusions

Measuring personal qualities by wealth is of course crazy in this context. This US-way of judging personal qualities has (god forbid) not yet really arrived in Europe. Let us indeed hope it continues like this. It might be wise to advice media on not printing all these crazy stories, but perhaps to no help. It seems all the “sensible people” really enjoys reading about the successful fools. Let us all hope they watch them as fools and not geniuses.

So dear reader, next time you come over a story on personal success, give my tiny simple argument some room in your head. Only real fools become really rich (and “successful”).

Good luck, and stay poor.

For those of the readers feeling the urge for a slightly more scientific approach, the following conference presentation [1] or the accompanying paper [2] may be of interest.

References

[1]       K. K. Haugen. Planning for success? Nordic Operations Research Con- ference, Reykjavik, Iceland, (Powerpoints), 1995.

[2]       K. K. Haugen. Planning for success? Nordic Operations Research Con- ference, Reykjavik, Iceland, (The article itself), 1995.

[3]       J. Lintner. Security prices, risk and maximal gains from diversification. Journal of Finance, (20):587–615, December 1965.

[4]       J. Lintner. The valuation of risk assets and the selection of risky invest- ments in stock portfolios and capital budgets. Review of Economics and Statistics, 47:12–37, February 1965.

[5]        J. Mossin. Equilibrium in a capital asset market. Econometrica, 35:768– 783, 1966.

[6]       W. F. Sharpe. Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19:425–442, September 1964.

[7]        J. Treynor. Toward a theory of market value of risky assets. 1962.

Editor’s note: This is a From the top of the Hill International Special. Haugen’s monthly column – Fra toppen av Haugen – is usually written in Norwegian. Ask Google Translate for help if needed.