- The Washington Times - Sunday, May 22, 2011


Back in the “good ole days,” you didn’t need a fancy college degree to make something of yourself. All you needed to achieve wealth was a willingness to work hard and have a spark of inventiveness.

A profile of the typical millionaire in the United States seems to confirm this narrative. Most millionaires, according to the seminal book “The Millionaire Next Door,” didn’t make their money in some highly complex business. In fact, it was usually some ordinary business — say construction or dry cleaning — that vaulted them into the ranks of the wealthy. Although fairly educated — almost 80 percent have a college education — education was not the distinguishing factor that accounted for their wealth.

The single biggest factor among them was their propensity to save.

Wealthy people save a far higher percentage of their income than their non-wealthy counterparts. On the other hand, in some professions that demand a higher “appearance” of status — say doctors or lawyers — people tend to live at or above their means. They save a relatively small amount of their income and have fewer investments in stock, real estate and other productive assets.

Although highly educated and respected in their fields, they also are some of the most highly leveraged. It is not uncommon to meet these types — the highly pedigreed professionals who, at midlife, resign themselves to dying with their student loans outstanding.

Paradoxically, those self-made millionaires who earned their wealth over a lifetime of work and savings tend to want something different for their children. The parents of an immigrant Indian family that saved enough from working at a 7-Eleven to eventually acquire their own franchise do not want their children to follow in the family business. They want their kids to get an elite education and become doctors and lawyers. These are not strictly economic aspirations; they are status symbols. Education, like fancy cars, homes and jewelry, is not always an investment. Sometimes it’s a form of consumption.

What’s the difference? The true test of whether an education is an investment or merely a form of conspicuous consumption is whether the degree or skills one learns is likely to increase one’s earning ability by more than the (time and monetary) cost of the education. This seems like a simple process to gauge — much like a back-of-the-envelope computation — but it is something that many college graduates fail to clearly consider before incurring huge debts and spending years collecting degrees from elite institutions.

It’s obvious by now that the latest collapse of the U.S. stock market and the ensuing recession was spearheaded by experts. They sold the public on their complex mathematical models purporting to show huge profits, all the while masking the risk of a total blowup.

In many respects, this is the societal effect of a miseducated population. It is the result of an overreliance by many people on the advice of experts, and the reliance of those experts on theoretical constructs that have little bearing on the real world. It is a classic case of mistaking the map for the territory.

Popular writer Nassim Nicholas Taleb aptly describes it as a case of “scholarship without erudition.” Mr. Taleb’s argument is simple yet nuanced. By concentrating for a long time on complex problems, experts tend to become experts in solving known problems, such as the probability of winning a casino game. But this tunnel vision prevents them from considering the broader factors that account for real-world events in which there is no complete information.

Under conditions of uncertainty that entrepreneurs confront in real-word business situations, tunneling (or focusing on known problems) is far less effective than remaining open and widening one’s perspective. Remaining open requires the ability to suspend belief about what’s happening, to get out of the textbook and into the decision under imperfect information. This type of perspective is becoming a lost art in today’s world of celebrated nerds.

Armstrong Williams is on Sirius Power 128 from 7-8 p.m. and 4-5 a.m. Mondays through Fridays. Become a fan on Facebook at www.facebook.com/arightside, and follow him on Twitter at www.twitter.com/arightside. Read his content on RightSideWire.com.

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