Why the Big get Bigger...

Photo by James Ting on Unsplash

Jeff Bezos probably has too much money. More money than he knows what to do with, and a lot more than the rest of us, that’s for sure. In fact, he and the other richest 10 percent own over 85% of the world’s wealth.*

That’s very little having a lot.

This is one of the more poignant examples of the 80/20 rule, discovered by Italian economist Vilfredo Pareto who noticed that 80 percent of the land in Italy was owned by 20 percent of Italians. This was back in 1896. Now it’s worse.

As the world has grown more connected and complex, this 80/20 principle has turned into 95/5, or even, 99/1.

99 percent of book sales can be attributed to only 1 percent of published authors. 

Over 90 percent of songs played on streaming platforms come from the same 50 or so artists.

And the vast majority of wealth in this world is owned by the richest ten 10 percent.

Now, this doesn’t seem fair. How are the rest of us supposed to go about our lives knowing that so much is in the hands of so few? And why doesn’t Bezos donate any of his billions for crying out loud? He has enough.

Well, I can’t answer those questions, but I can start to explain why the world ended up like this.  The reason the world skews to such extremes can be attributed to two different principles; The Tournament effect, and the Matthew Principle.

The Tournament Effect was coined by Economist Sherman Rosen and explains that in zero-sum environments, a player with only a marginal advantage can win the entire pot.

Let’s say my Golden State Warriors were playing the Sacramento Kings. Of course, the Warriors are better, and no matter how many points the Kings score, at the end of the game, if they have less points, they lose the entire game. They don’t get extra points for keeping the score close.

Likewise, in poker, you could have a pretty good hand, but if someone has a better hand than you, they are taking all your chips and most of your dignity along with it. No consolation prizes for you. 

This same principle can be illustrated in the marketplace. For example, someone would be a lot more willing to buy a book by Hemmingway for 10 dollars than a book by an unknown author for one. Hemmingway’s skill is in being perceived as better than the unknown author, therefore he can ask for a higher price and take away money that could have gone towards bolstering this new author’s career.

Similarly, Apple is able to charge absolutely criminal prices for an iPhone even though rival technology has caught up to a point where they are about equal in quality at lower prices, just because the image they have is of higher quality.

The second explanation for these disparities is called the Matthew Effect. This explanation, named after the same gospel author that inspired my own name, was produced by sociologist Robert K. Merton. The Matthew effect is more often referred to as cumulative advantage, in which a single success or win can lead to continued success and winning, while conversely a single failure or loss can lead to more of such.

The Matthew effect takes into account the effect luck could have, something the tournament effect misses out on. Despite being underdogs, the Kings could upset the Warriors, leading to a period of momentum that carries through to future games.

If I was lucky enough to grow up best friends with Elon Musk, I probably could have secured myself several good looking job positions at Tesla or SpaceX, which in turn could have gotten me hired at other attractive firms that other people may have been more qualified for.

The Matthew Effect also explains why things become popular or don’t.

As an idea or product reaches critical mass, it will become more attractive to its market audience. I was not a big fan of Snapchat, but once all my friends downloaded it, I followed in suit.

English became the dominant language of the world because it reached a point where the majority of people knew it. It became in people’s better interest to learn English because learning it would allow them to communicate with the majority of the world.

Once Amazon became the place that had everything online, every company was forced to list their products on it for lower margins or else lose out on the marketplace where everyone shopped. The same goes for Walmart in the physical realm and Apple’s app store in the digital. The big benefit from their size and are able to leverage it into trillion dollar companies.

So, are we doomed to live in a world where the big get bigger and the small get smaller?

Unfortunately, as long as we continue with the current conditions, yes.

But that does not mean that what is big can never fall. Eventually, someone will get lucky and replace those that were lucky before them.

Think of all the companies that disappeared because of a couple of kids making computers in their garage.

Of the 500 largest companies in 1954, only 74 were still part of that group 50 years later.

And it’s never been a better time to be lucky. The internet has removed traditional obstacles with the access it provides and the creation of allowances like self-publishing and crowdsourcing.

It is possible to become part of the 1%. All you need is an internet connection, a good idea, and maybe a rabbit’s foot for some luck.

*Global Wealth Report, Credit Suisse, 2013