Introduction
Understanding the origins of wealth inequality is critical in the debate over what, if anything, to do about it. In this note, we propose a simple model which is still rich enough to reproduce observed patterns of wealth inequality. We call it the Concentrated Asset Betting (CAB) model. A key element of CAB is a phenomenon known in the gambling world as "over-betting the edge." Our approach was inspired by Bruce Boghosian’s Scientific American article "Is Inequality Inevitable," which provides an introduction to a straightforward model of wealth inequality called the "Yard Sale Model" (YSM).
In a Yard Sale model, it is assumed that people enter into repeated exchanges with each other. In each exchange, one party is chosen at random to be the "winner" and one the "loser." The absolute size of the exchange is determined by the assets of the less-wealthy party. As the number of exchanges increases, the model converges to one person having all the money in the economy. To match observed levels of wealth inequality in different countries at different times, the YSM is then extended to include wealth redistribution and a couple of other enhancements.
Model Description
The model we propose is based on the observation that a high fraction of investors have experienced sub-par growth in their savings, after allowing for consumption and philanthropy, relative to the tremendous long-term growth in the public stock market. Victor presented some anecdotal evidence of this in his TEDx talk, "Where Are All the Billionaires and Why Should We Care?" Some of the reasons put forward to explain the shortfall in investor returns include investment fees, commissions and taxes. Our model suggests there may be something even larger and more insidious at work - pervasive and systematically poor money management. Here, money management means the task of sizing and diversifying the
