The Fair Reward Problem: The Illusion of Success and How to Solve It

43 Pages Posted: 25 Apr 2019 Last revised: 29 Apr 2019

See all articles by Didier Sornette

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute

Spencer Wheatley

ETH Zurich

Peter Cauwels

ETH Zurich; Director Quaerens CommV

Date Written: April 21, 2019

Abstract

Humanity has been fascinated by the pursuit of fortune since time immemorial, and many successful outcomes benefit from strokes of luck. But success is subject to complexity, uncertainty, and change – and at times becoming increasingly unequally distributed. This leads to tension and confusion over to what extent people actually get what they deserve (i.e., fairness/meritocracy). Moreover, in many fields, humans are over-confident and pervasively confuse luck for skill (I win, it’s skill; I lose, it’s bad luck). In some fields, there is too much risk-taking; in others, not enough. Where success derives in large part from luck – and especially where bailouts skew the incentives (heads, I win; tails, you lose) – it follows that luck is rewarded too much. This incentivizes a culture of gambling, while downplaying the importance of productive effort. And, short term success is often rewarded, irrespective, and potentially at the detriment, of the long-term system fitness. However, much success is truly meritocratic, and the problem is to discern and reward based on merit. We call this the fair reward problem. To address this, we propose three different measures to assess merit: (i) raw outcome; (ii) risk-adjusted outcome, and (iii) prospective. We emphasize the need, in many cases, for the deductive prospective approach, which considers the potential of a system to adapt and mutate in novel futures. This is formalized within an evolutionary system, comprised of five processes, inter alia handling the exploration-exploitation trade-off. Several human endeavors – including finance, politics, and science – are analyzed through these lenses, and concrete solutions are proposed to support a prosperous and meritocratic society.

Keywords: success, reward, luck, merit, measurement, scenario analysis, Darwinian, evolutionary learning, equality

JEL Classification: A13; C12; C18; D39; D63; D8; G10; H30

Suggested Citation

Sornette, Didier and Wheatley, Spencer and Cauwels, Peter, The Fair Reward Problem: The Illusion of Success and How to Solve It (April 21, 2019). Swiss Finance Institute Research Paper No. 19-25. Available at SSRN: https://ssrn.com/abstract=3377177 or http://dx.doi.org/10.2139/ssrn.3377177

Didier Sornette (Contact Author)

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Spencer Wheatley

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Peter Cauwels

ETH Zurich

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Director Quaerens CommV ( email )

Bruges
Belgium

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