Billionaires and the Evolution of Overconfidence

To understand billionaires, you need to understand horizontal inequality, illusory control, self-selection bias, quantified self-worth, and the evolution of overconfidence.

Thank you for reading The Garden of Forking Paths. I rely on reader support exclusively, so if you enjoy my writing, or learn something new from it, please consider a paid subscription.

The Billion Dollar Question

What would you do if you suddenly had a billion dollars?

The way you answer that question will tell you something about how likely you are to become a billionaire in the first place.

For most of us—myself included—the answer to that question gets split into two parts: logistics and philanthropy. First, for logistics, you might consider: what would you change about your life once I never have to worry about money ever again? This is the “would you quit your job?” or “would you move somewhere else?” part of the question. Second, if you’re a decent person, you’d probably consider who you’d help and how you’d allocate a substantial portion of your obscene, newfound wealth to people who need support. To us, money is for something, it’s not a goal in itself.

That means we probably won’t become billionaires.

When billionaires first become billionaires, they have a different answer to the question of what they’d do if they reached a billion dollars: “I’d figure out how to make two billion.” This is a trait that pretty much every billionaire has. If they didn’t, they’d give enough of their wealth away to become a mere hundred millionaire.

The billionaire’s answer is what’s known as an infinite regress, in which every answer produces another answer, an ever-higher sum, an endless pursuit of wealth—an unquenchable thirst. At the level of a billionaire, it’s absurd, grotesque even. (If you started spending $5,000 per day, 365 days a year, it would take you just 547 years to exhaust a billion dollars; for perspective, Christopher Columbus landed in America 531 years ago).

Billionaires, for all their flaws, are interesting—precisely because you can learn unique insights when you examine humanity at its extremes. Just as our understanding of the human brain was advanced by split-brain patients or a man who survived an iron rod being driven through his head, billionaires are outliers that give us a window into flawed social dynamics. And they’re outliers not just in terms of wealth, but often, in terms of greed, an obsession with horizontal inequality, self-selection, illusory control, and, perhaps most fascinating of all, overconfidence.

In short, billionaires provide a window into so much about what is wrong with modern life—and the broken systems of how we allocate wealth and power.

Billionaires and Self-Selection Bias

I’ve spent much of my career studying powerful people, interviewing more than 500 leaders all over the world, from America to Zambia, Belarus to Thailand, Madagascar to Tunisia. As part of my research, I’ve met many billionaires. And the most important lesson I learned in those interactions was that these people were not normal. I don’t mean that in a nasty way (though often they deserved it). I mean it in a statistical way — they were abnormal outliers.

That led me to recognize one of the most important insights about our social world. Every group of people, whether it’s a high school sports team, the readers of this newsletter, a club of dictators, or a group of billionaires, is a non-random subset of the population. We are sorted according to our characteristics.

Sometimes, as with poverty and systemic inequalities, that sorting is done to us, even before we are born. But in other contexts, the sorting is done by us, in what’s called self-selection bias.

For example, if you held a tryout for a high school basketball team, the people who show up to that tryout are more likely to be tall, on average, than the general population. Short people may turn up, but there will be fewer of them. That system — the tryout — is partially selecting for height. Once you start thinking this way, you realize that every social system attracts some people and repels others in a non-random way. The audience for Swan Lake and a monster truck rally are not the same.

Self-selection bias plays a bigger role in systems that are both small and skewed. For example, the AARP, a political interest group for older Americans, is large and selects on just one factor: age. As a result, it’s not random, but it’s nonetheless full of a varied panoply of aged Americans. By contrast, finalists at the Scripps National Spelling Bee or inductees to Skull and Bones, an elite secret society at Yale, are more likely to be much more affected by self-selection because they’re smaller groups and they’re skewed by highly unusual traits.

There are 2,640 billionaires in the world — 0.000033 percent of the population. It’s a tiny group. And it’s skewed heavily by a series of really unusual traits, which means selection plays a major role in determining who becomes a billionaire.

Now, you can’t just self-select into any system you like, otherwise there’d be a lot more billionaires. Instead, the systems we design winnow people out. For example, let’s imagine you show up to a Spelling Bee, but you’re terrible at spelling. There’s an objective skill being measured, so even if you self-select into that world, you’re not going to win. In that system, there’s a strong overlap between success and talent. The winner of a spelling bee may not be the world’s best speller, but they will certainly be one of the world’s best spellers.

Now, consider other social systems such as power and wealth. If you want to become powerful, you usually have to want power. We have a word for that: “power-hungry,” and it’s not a compliment. It quite literally means someone who seeks power — and rarely do you get power without seeking it. The most powerful people in our societies are therefore those who, by self-selection bias, seek power — and then have managed to get power and stay in power.

But now, unlike the spelling bee, there’s a bit of conceptual leakage. What we want is someone who is good at wielding power for the benefit of us all. But what we’re actually selecting for in our political systems is someone who wants power, is good at getting it, and then never letting go. Our systems select for the wrong thing. It’s as though you were to hold a spelling bee but then choose then winners based on who is best at convincing you that they can spell, rather than who can actually spell.

The same is true for wealth. In an ideal world, the people most rewarded financially in our social systems would be those who generate the most shared wealth and prosperity, or those who innovate and help humanity the most; or those who are the wisest and most selfless and could therefore use their wealth for its maximal impact.

But that’s not what our modern economies select for at all. Many of the smartest people on the planet are not driven by money, so they’re not even in the running to become a billionaire — just as many of the people who would make the best politicians are those who least want political power. They’re not in the game, so they can’t win. Many theoretical physicists are geniuses; none of them are billionaires.

By contrast, few billionaires are geniuses, but all of them think they are (as I’ve written about previously in The Myth of the Secret Genius). So, how are they selected?

The Lake Wobegon Effect and Evolution of Overconfidence

Billionaires are rarely creatures of crippling self-doubt. That’s because to become one, you have to believe in yourself to an audacious degree, even when it’s not warranted.

When there is a gap between your abilities and your self-perception of those abilities, that’s known as overconfidence. Studies have repeatedly shown that many of us are, to draw from Prairie Home Companion, subject to the Lake Wobegon Effect, in which large majorities believe themselves to be above average “in intelligence, sense of humour, driving ability, and similar traits.”

Billionaires are off the charts when it comes to the Lake Wobegon Effect. But this widespread trait of humanity poses a puzzle: why would our species evolve to foster overconfidence? Surely the best way to survive would be to have an accurate self-perception of our abilities rather than an inflated sense of what we can accomplish?

Not so, according to a flagship paper published about a decade ago in Nature on the evolution of overconfidence. The math is tricky, but the gist is relatively straightforward to understand.

Let’s say that you and another hunter-gatherer in the Stone Age are both starving and you come across some ripe berries just waiting to be plucked. There aren’t enough for both of you to have your fill, so one of you will take the berries and the other will go home empty-handed and hungry. Now, there’s an objective skill here: one of you is the better fighter and one of you is the worse fighter. But you don’t know which is which. So, what’s the rational strategy to pursue?

As long as you’re not likely to suffer serious injury, the answer is to be overconfident. That’s because if you happen to be the stronger fighter, then overconfidence is a win-win — a bit of swagger might scare away your rival, thereby avoiding any risk of injury, but if you do fight, you’ll still win and get the berries.

If you’re the weaker fighter, you’re not going to get the berries if you fight, so your best bet is to scare away the rival before you fight through an overconfident display. Crucially, though, if you’re not overconfident, you might not even try for the berries — and, as Michael Scott once taught us: “You miss 100% of the shots you don’t take.” Overconfidence puts you in the running; it produces self-selection bias.

Unfortunately, overconfidence still produces rewards in the modern world, because our social systems reward people who appear effective, rather than those who are effective. Those who look like leaders to us are more likely to become leaders; and those who look wealthy are better at becoming wealthy. It’s unfortunate, but true, and it means that people with an inflated sense of their abilities control disproportionate amounts of both wealth and power in modern society.

(Fascinatingly, a study from about a decade ago found a neurological basis for such extreme overconfidence. They found that levels of connectivity within the brain’s fronto-striatal circuit were inversely proportional to the illusion of superiority over others. The more connectivity, the less people were deluded by overconfidence).

Luck and the Reinforcement of Overconfidence

Now, instead of examining the 2,640 people who are billionaires, let’s consider a much larger group of people who are actively trying to become billionaires. In that non-random subset of the human population, one of the traits that’s being selected for is overconfidence. Studies have shown this is a trait over-represented in entrepreneurs more generally.

In one study of 2994 entrepreneurs, “81% believe their chances of success are at least 70%, and 33% believe their chances are a certain 100%. In reality, about 75% of new businesses no longer exist after Žfive years.” It’s the Lake Wobegon Effect on steroids.

Within the pool of people who want to become billionaires, there is a mix of traits, but due to self-selection bias, greedy, overconfident people who see themselves as exceptional are more likely to be in the mix relative to the general population.

There will, of course, be an array of talents and skills—some exceptional innovators, others talentless fools. There will also be variation with regard to traits that are correlated with obtaining wealth: inheritance and family wealth, demographic characteristics, nepotism and the connections you have, and so on. And then, some in the mix will get lucky, while others will be unlucky.

Now, unlike the spelling bee, which is good at rewarding a specific, measurable talent, becoming a billionaire is a bit more like winning the lottery. Sure, you often have to have a good idea (which is like buying a ticket), but it’s also about being in the right place at the right time—and having the connections, resources, and luck to translate your idea into a business empire that can scale up quickly (which is like having the winning ticket). Was Jeff Bezos the only person on Earth who understood that e-commerce would be a way to make money? Hardly.

But here’s the problem: when someone becomes a billionaire, it’s the ultimate validation of their overconfidence. It’s as though billionaires who are overconfident show up to the high school basketball tryout even though they’re not necessarily good at basketball but nonetheless make the team. Their overconfidence is then reinforced—and they wrongly presume that they’re good at other things too.

This leads to a dangerous delusion known as illusory control, in which a person mistakenly thinks they can shape outcomes to their liking even when they can’t. This occurs frequently when someone who has been successful in one domain chalks that success up purely to talent rather than to a more accurate assessment of their abilities and knowledge. They then assume that everything they touch will turn to gold and are surprised when it doesn’t. (See: Musk, Elon and Twitter, slow death of).

Greed and Why $1 Billion is Never Enough

Let’s return to our opening question: what would you do if you suddenly had a billion dollars? That question sorts people between those who see money as for something and others who see money as the goal itself. Billionaires are more likely to be in the latter category.

But it leads to the obvious question: why do billionaires always want more? I presume that many of you, like me, would feel that there’s a level of wealth at which I couldn’t possibly want any more money—and that number is much lower than $1 billion. So, why do billionaires seemingly have an unquenchable thirst?

Michael Norton, of Harvard Business School, argues that most people ask themselves two key questions when evaluating their success. Am I doing better than I was before? and Am I doing better than other people? An Atlantic article from a few years ago explains the implications of these questions in the context of billionaires:

“But the problem is,” Norton says, “a lot of the things that really matter in life are hard to measure. So if you wanted to be a good parent, it’s a little hard to know if you’re being a better parent now than you were a year ago, and it’s also hard to know if you’re a better parent than the neighbors.”

So people turn to dimensions of comparison that can be quantified. “Money is a terrific one,” Norton says. “If I need to know if I’m doing better than I was, the easy thing to ask is, Am I making more money? or Does my house have more square feet? or Do I have more houses than I used to?”

The problem is worsened by a phenomenon known as horizontal inequality. We measure ourselves not against society as a whole, but relative to those closest to us. Billionaires often live near other billionaires and socialize with them (this is why yacht clubs exist), so their benchmarks shift. They compete with each other, so assessments of their wealth are transferred within the 0.000033 percent of the population, rather than relative to the 99.999967 percent of the population they’re above.

Again, in The Atlantic:

Brooke Harrington, a professor at the Copenhagen Business School who has studied and written about the financial practices of the super-wealthy, says that the question many rich people ask themselves about their money is not Do I have enough to buy this expensive thing I want? but rather Do I have as much or more than these people I’m comparing myself with?

Unfortunately, people who think like that — who have an insatiable thirst for money — are more likely to get obscenely rich. But they don’t usually end up very happy. And here’s a stat that will make you unhappy, too: 156 billionaires on the Forbes 400 list have given less than 1% of their wealth away to charity. I do not envy these broken people, and nor should you.

The Big Picture

So let’s put this all together. The club of 2,640 billionaires is, like any group of humans, a non-random subset of the population that is skewed by self-selection effects.

In particular, the people who try to become billionaires are more likely than the rest of us to be greedy and overconfident (the latter, a trait that evolved for rational reasons, but that has produced some unfortunate outcomes).

But they’re also likely to have other advantages such as family wealth, connections, and so on — along with a fabulous amount of luck and fortunate timing. When they strike it rich, they mistake that good fortune as a validation of their inflated sense of their own talents, reinforcing their overconfidence, and developing a dangerous sense of illusory control.

However, because of their obsession with horizontal inequality, a billion dollars is never enough for a billionaire. They just keep angling for that next billion, in a Quixotic quest to entrench their status and outcompete their peers.

These lessons are not mere curiosities that can allow us to stroke our chins with the fulfilling delights of acquiring fresh wisdom and say “aha, now I understand billionaires!” (Though, by all means, feel free to do so).

Rather, these lessons are a call to action. The billionaire class is the visible manifestation of a broken system, which attracts and promotes the wrong kind of people into wealth and rewards them in a way that is very unlike a meritocratic spelling bee. The good news is that, like all systems, these systems can be changed, to create stronger overlap between who we hope to reward—those who help society and improve our world—and who we actually reward too often: greedy overconfident narcissists who can never get enough of their grotesque wealth.

Thank you very much for reading this edition of The Garden of Forking Paths. If you’d like to support my work, please consider upgrading to a paid subscription. You’ll get twice as many articles, and you’ll ensure that I can keep writing for you. Please share this article with your friends and family, too, as I rely on word of mouth to reach more people.