« Suite Francaise | Main | Where's Steve? »
Getting Lucky on My Way to the Top
The market for economists was in a slump when I graduated. I was fortunate to earn a visitor's position at the University of Virginia and then a tenure-track position at Ball State University in Muncie, Indiana, but I had few alternative offers. My colleagues in Muncie were good but after a few years I was unhappy enough with the university and the town to take a flying leap to become director of research at the Independent Institute in Oakland, CA. At the time, I thought this was the end of my academic career.
David Theroux at the Independent Institute encouraged my academic work, however, seeing it as consistent with the Institute's focus on research, and I kept publishing. Events (and especially Tyler!) then conspired to bring me to GMU for which I am very grateful.
All this is by way of introducing Austan Goolsbee's latest column in the NYTimes. Goolsbee discusses two new papers which demonstrate that economic conditions in the year in which you graduate can have a surprisingly long-lasting effect on career earnings.
The Stanford class of 1988, for example, entered the job market just after the market crash of 1987. Banks were not hiring, and so average wages for that class were lower than for the class of 1987 or for later classes that came out after the market recovered. Even a decade or more later, the class of 1988 was still earning significantly less. They missed the plum jobs right out of the gate and never recovered....
These data confirm that people essentially cannot close the wage gap by working their way up the company hierarchy. While they may work their way up, the people who started above them do, too. They don't catch up. The recession graduates who actually do catch up tend to be the ones who forget about rising up the ladder and, instead, jump ship to other employers.
I take three points from my career and this research. Leaving the academy turned out to be the just the thing to set me apart from the pack. It didn't have to work out that way but when your mean is low you need to throw some variance into the mix. Finance theorists will recognize this lesson from options pricing theory.
Second, I moved across the continent twice - from Fairfax, to Charlottesville, to Muncie, to Oakland and then back to Fairfax - sometimes with my wife and sometimes not - all in the space of about 10 years. After moving so often, when I browsed book stores my decision to buy was based more on the weight of the book than on the price. Jumping ship repeatedly, however, did help me to recover from a difficult beginning.
Third, luck matters.
Addendum: Now Open to Comments.
Posted by Alex Tabarrok on May 26, 2006 at 07:03 AM in Economics | Permalink
Comments
"Third, luck matters."
In health, too.
Posted by: Russell L. Carter at May 26, 2006 10:45:33 AM
Luck matters --> cultivate humility.
Posted by: Bill Gardner at May 26, 2006 11:12:15 AM
"Luck Matters"
I am pretty strongly in favor of free markets and meritocracy, and all that, but, there is no doubt in my mind at all that "Luck Matters" a heck of a lot. I graduated in 2002, and with the markets reeling, the accounting industry was quite heavily mixed up. That's life, went to law school instead, graduated got a job, things worked out. But there is no doubt in my mind that luck matters a whole lot. Perhaps of course, touching on immigration, the biggest "luck matters" event in our lives is just being born to the right parents in the right place.
Often enough conservatives like myself, and libertarians take meritocracy a little too far for my liking and forget how much "luck" has helped us along the way. Or perhaps as better put in a far earlier generation, "There but for the grace of God go I." Keeping that perspective helps keeps one appropriately humble.
Posted by: Joel B. at May 26, 2006 11:13:35 AM
Jane Galt recently had a post about this. She faced and faces essentially the exact problem studied in the paper. She graduated from an elite business school (University of Chicago) in a year where nobody was hired.
Her post was long on how much it seemed that luck had played a huge role in her life and it got her to thinking that maybe luck plays a larger role in life than she had previously imagined.
However, her comments were filled with people who were claiming things like "you make your own luck", which is a good way to live, but simply not true.
The sad thing was for me at least, that they were saying this to this extremely talented and intelligent person who watched their expected life earnings decline by probably about 50% and several million dollars, simply because she had the bad luck to graduate in a year where grads were not being hired. Her decisions and initiative had nothing to do with her lack of getting a job. They showed no awareness of this huge fact.
Now Jane was pretty upbeat about this, and was happy she was able to be a journalist. However, I suspect a few years of a fun and challanging private equity job and $200K+ salary and huge bonuses would have made her pretty happy too, and she wouldn't currently be eating rice for $.42 a meal.
Not only that, her resume is going to read 'journalist and blogger' while some dot-commers is going to read, 'In charge of $10M advertizing budget' simply because they graduated 2 years earlier.
So my question is:
Whats a good philosophy to live by while being realistic? Luck matters - how can make this a useful belief?
Posted by: mickslam at May 26, 2006 11:42:18 AM
And-
Thanks for keeping this blog interesting. Its one of the best of the web.
Posted by: mickslam at May 26, 2006 11:43:48 AM
Mick,
Luck matters, but so does what you do. Take advantage of available opportunities, and put yourself in an environment where opportunity is likely to present itself. That way, you can maximize your chances.
And if you happen to graduate in an off-year, you accept it and move on.
Posted by: Jonathan at May 26, 2006 11:52:32 AM
Born under a bad sign
Been down since I began to crawl.
If it wasn't for bad luck
You know I wouldn't have no luck at all
Hard luck and trouble been my only friends.
I've been on my own ever since I was ten.
I can't read. Can't hardly write.
My whole life has been one big fight.
You know wine and women is all I crave.
A big-legged woman gonna carry me to my grave.
You know if it wasn't for bad luck,
I wouldn't have no kind of luck.
If it wasn't for real bad luck,
I wouldn't have no luck at all.
Title: Born Under A Bad Sign
Artist: Albert King
Composer: William Bell and Booker T. Jones
Posted by: Robert Schwartz at May 26, 2006 12:37:02 PM
As one of Alex's former Ball State colleagues, I want to say thanks to Alex for the positive words about the economics department at BSU. Let me speak to the issue of LUCK in Alex's case in this way: the quality of our department jumped up markedly when Alex arrived and down when he left. He was a great colleague because: 1) he has lots of human capital; 2) he has an amazing work ethic; 3) he loves an intelligent argument; and 4)he has a good natured sense of humor.
Posted by: jim at May 26, 2006 12:37:47 PM
Mick, there's a stochastic element to everything important life, including careers. It's like in Texas Hold'em. We're all randomly assigned different hole cards, which interact with the community cards differently, have different stacks, playing against players of different skills, and future cards can make you rich or leave you poor. All you can do is try to learn the game you're in, study it closely by collecting as much information on both the nature of the game and the players, and make decisions which have are profitable plays from the longrun. No one can control which ways the wind blows, but you can make good decisions, and try to put yourself in positions to take advantage of the good luck when it comes your way.
Posted by: Jason Voorhees at May 26, 2006 12:40:23 PM
I would imagine that the instinctive reaction of many on the Left to this is "See! Luck matters, so government needs to step in and regulate the labor markets to make it fairer to people who graduate in bad years."
However, greater labor regulation tends to lead to a focus on security, and thus much less changing of jobs. As the article points out, changing jobs is a way to avoid being locked into a bad fate. Greater labor regulation is as likely as not to exacerbate the problem by making it more likely that people are stuck in the first job which they get.
Posted by: John Thacker at May 26, 2006 12:48:00 PM
John,
I think very few people would argue for greater labor regulation simply based on luck being an important (or even the most important) component of individual economic success. Labor regulation simply doesn't seem the best tool to address this issue.
Instead many people have and do use the importance of luck in economic outcomes as an argument for a progressive tax system and for the need for a social safety net. Which is also why many "on the right" feel a need to deny that luck plays such an important role in the wealth and income distribution.
Posted by: Commenterlein at May 26, 2006 12:54:36 PM
In bad times in terms of business cycle the state doesn't hire too much either. This makes the "luck" argument obsolet. The state can't always manage to hire a constant rate of top people at a high wage either, futhermore they don't hire any people at really high wages, the us president earns quite little for his big position.
so why blame the market when the state can't do it any better?
Posted by: benny at May 26, 2006 1:35:52 PM
I think that the author of the paper is almost certainly correct that luck/business cycle plays a large role in lifetime earnings/achievment. While working as a consultant one of our clients was on of the first big internet search engines, they had many millionaries working there who could charitable be described as second-rate. They had the tremendous good fortune to be at a firm that IPO'd during a tremendous bull market.
But we shouldn't forget that many of us also had the tremendous good fortune to be born in free-market democracies where wages like this are even possible.
The market might provide it's gifts in a somewhat stochastic manner, but at least it provides those gifts at all.
Posted by: lannychiu at May 26, 2006 1:52:30 PM
Let luck play it's role. Perhaps I'm to much like Ayn Rand in my views, but I refuse to accept some sort of government "leveling" system to try and make things equal. Those that truly want to rise can do so, but can only rise so far as their will and wit take them.
Posted by: AnonymousOne at May 26, 2006 2:00:03 PM
I'm surprised this thread has so much emotion over "making your own luck" and whether one should blame the market or the state. Is luck this much of a libertarian hot button? Is calm rationality or emotion usually more favorable to the libertarian cause?
What Alex and Goolsbee are discussing here is a simple, empirical point, one which makes testable predictions and can provide practical advice. Namely:
-- try to graduate early or leave grad school if times are good
-- go for a masters degree or double major if times are bad, or take a year off and then resume schooling
-- if you are stuck in a bad cohort, take more risks to increase your variance.
This kind of advice would have been really helpful to me when I graduated from college, and I'm sure it will be helpful to future college graduates as well.
Posted by: DK at May 26, 2006 2:21:07 PM
"Those that truly want to rise can do so, but can only rise so far as their will and wit take them."
That statement nicely illustrates the victory of ideology over evidence.
Oh, and George W. Bush
Posted by: TankMSpanara at May 26, 2006 2:21:12 PM
Scientific careers are remarkably luck-dependent. Nearly one hundred years ago, Max Weber, in his essay "Science as Vocation," noted that few careers depend on luck as much as science. Having the right advisor, getting that one post-doc or having the one conversation that sparks the idea leading to brillinat articles. Heck, the difference between six years as an assistant prof at Harvard and years in the post-doc market can be a single 30 minute job talk. Startling when you think about it.
There's also research that backs up Weber's intution. I cite the work of my colleague Scott Long, who has extensively documented this. He found that initial academic placement is not well correlated with observable qualities (like publications or citations) but that departmental prestige does have a subsequent impact on performance. In other words, there's a lot of luck in who gets jobs and how people move, but being in a strong department can help you become more productive. Bottom line: there's a lot of randomness in who ends up where, but where you end up has a big effect on how much you accomplish while you are there. (J. Scott Long. 1978. "Productivity and Academic Position in the Scientific Career," American Sociological Review 43: 889-908.)
So Alex was very lucky - all of his post-PhD jobs encouraged him to be productive and an opportunity opened at Mason. Of course, what you get out of your career depends on what you put in, but Alex's talents may have gone to waste if these events had never occured. Loyal readers of MR should be eternally grateful that Alex was so fortunate, or else this blog would be dedicated solely to "markets in everything," "facts of the day" and ethnic food reviews!
Posted by: Fabio Rojas at May 26, 2006 2:28:23 PM
Starting with genetic material, luck certainly plays a role in our lives.
I remember that Jane Galt post about luck, and also note Alex's comments. Concerning the extent to which post development luck plays a role in your life, I would note that after experiencing some bad luck, people tend to make decisions that mitigate probability's influence - probably to the point of being self damaging. People become career conservatives even if what they have is not close to ideal.
Life is full of moments in which we can choose to hit the reset button. Most of us don't start all over or take career risks because we seek security. Alex opted to change roles. He wound up better off not becuase of general luck, but because he had the fortitude to take some risks. My view is that people who can stomach opportunity maximizing decisions will appear luckier in the end. If we shift into a conservation mode only after we have given ourselves the opportunity to shoot for what we really want, we lock in the gains of fortune instead of locking in the losses.
Posted by: Jason Ligon at May 26, 2006 2:50:43 PM
Luck, schmuck! Alex, tell us all again how your views of immigration demostrate how morally pure you are. I just love hearing it! It reminds me of pro-welfare liberals in the 70s--happier times for many!
Posted by: Brian at May 26, 2006 3:02:06 PM
Jason,
Your statement completely disregards the conclusion of the study. They compared people who we can assume, were pretty similar. The only difference between them was the graduation year. They were all pretty highly motivated - they did go to Stanford.
Quote:
"Even a decade or more later, the class of 1988 was still earning significantly less. They missed the plum jobs right out of the gate and never recovered"
Then note this:
"The recession graduates who actually do catch up tend to be the ones who forget about rising up the ladder and, instead, jump ship to other employers."
These people took significantly more risk to get the same results as someone who graduated just a few years before or after them.
Alex is hugely talented, but talent and risk appetite are two different things. What if he was equally talented, but more risk adverse? We wouldn't be reading this blog, because he would never had made a risky move to an institute that could have turned out quite badly for him as it has for others.
Posted by: mickslam at May 26, 2006 3:06:22 PM
mickslam:
I think we are saying the same thing. This:
"Alex is hugely talented, but talent and risk appetite are two different things."
is more or less my point. Risk appetite matters as a component of eventual success. It allows you the opportunity to recover from inevitable bad luck. There are some who are initially fortunate in the way of getting a large inheritance or some such, and those people never really have to engage in risk taking, but much of the year of graduation sort of luck can be mitigated or even capitalized on with a bit of intestinal fortitude.
I would also emphasize the research showing us how bad at managing risk we really are (remember that Tim Harford bit about rental auto insurance?). I'm arguing that luck would play a much lesser role in our lives if we understood better which risks are reasonable instead of defaulting to conservative all the time.
Posted by: Jason Ligon at May 26, 2006 3:51:53 PM
Jason,
I agree with you about the misunderstanding of risk in our lives, its an issue thats pretty dear to me.
However, I don't think we are saying the same thing about intestinal fortitude. The point of the studies was that people of equal talent and drive have wildly different outcomes due largely to luck. The assumption was that each class of Stanford MBA graduates are essentially similar in makeup in terms of talent, ambition and risk taking. After ten years, some classes make less money, due exclusvely to reasons beyond their control.
I agree, an increased appetite for risk can mask bad luck if you are successful after that risk has been taken. That idea is based on the supposed link between risk and return. I will also argue that for the very most successful, like the top 1% of Stanford MBA students - a very small percentage indeed - it doesn't matter when you graduate. However, for most exceptional people - go ahead try getting into Stanford B school - talent was a secondary factor to luck.
These papers are saying something fundamentally different than talent beats luck. They are explicitly saying, even among extremely talented, driven people, luck makes a significant difference in your earnings and overall long term success. I'm assuming that Stanford MBA grads are among the most driven people in the country, people who consistently put themselves into situations where they can be the 'luckiest', given their current choices. This study says, even in this group, luck really matters and is significant. You don't always make your own luck, sometimes, its just luck.
Posted by: mickslam at May 26, 2006 4:39:04 PM
"That statement nicely illustrates the victory of ideology over evidence."
I kind of resent an underhanded blow like that.
Yes I am completely willing to admit that there are ... problems or that certain individuals at certain times face additional problems when getting into the job market. But you'll also find that people that graduate at the top tend to have a higher salary and be hired at a greater rate.
Those in the top of their class, might be lucky, but are more likely to be smarter and have a better work ethic.
God forbid that people be responsible for themselves.
Posted by: AnonymousOne at May 26, 2006 4:49:04 PM
Do you tink that graduates from the elite schools (ivys and maybe top 20) are immune from (or less affected by) economic trends. Is your advice specific to the field of economics or does it extend to other disciplines (which ones)?
Posted by: Chairman Mao at May 26, 2006 5:44:31 PM
Connections and filtering has a lot to do with it as well.
Without being offensive, I'd like to note that Alex's CV doesn't look that great up through 1999. But, what it does look like is that he is taking off on a successful research program. And, he had a connection with someone from a better school with a stronger CV. Maybe that's luck, and maybe it's skill, but I think it is the combination of the two that made it work out for him.
I'd also add that he hasn't had a mid-career fade (from marriage, kids, burnout, eldercare, this-old-housism or whatever). That helps too.
Posted by: David Tufte at May 26, 2006 5:57:58 PM
