Thursday, January 21, 2016

Seduced by Meritocracy

The idea of Meritocracy is seductive. It feels like it removes the arbitrary nature of opportunity allocation at birth, or of established networks and friendships. I found it interesting then hearing Adam Smith's discussion of Primogeniture in 'Wealth of Nations'. Stemming from an agricultural past where dividing lands made them harder to protect, giving the right of inheritance to the oldest male heir took root because it wasn't arbitrary. Using meritocracy to decide who should take charge was too subjective. Age and Gender weren't up for discussion. Keeping it together gave the heir the responsibility to look after everyone.

The Wealth of Nations was published in 1776, yet amazingly, it is reasonably easy to listen to. There are digressions into the finer details of corn trading and weighing of coins, but there are also lots of very relevant issues for today. It is an interesting way of seeing how even liberal people, for their time, say some hectically illiberal things. While embarrassed about the vile engagements of Europeans with indigenous people during the Age of European Discovery, he was clearly still a believer in superiority of types of people.

Superiority is deeply subjective. Even when it comes to merit. It is seldom unequivocally clear when someone is better at something. We don't have the clarity of 100 metre sprints to sort out how fast people are. Measurement of skill and ability searches for quantitative measures. Quite often these measures have a huge wave of random noise swamping them.

Take Investment Management as an example. How do you decide if someone is a good investor? You will have seen the disclaimer on every investment product 'Past Performance Is Not an Indicator of Future Results'. There is a very factual, not at all subjective, measure of an investors performance. The benchmark is what you would have done with the money if you hadn't given it to them. For global area investment, this is quite often the MSCI World Index. If an investor is asked to focus on a specific area, or asset class, you can give them a different benchmark. How they have done relative to that benchmark is then crystal clear.

The how is far less interesting than the why. A big part of the how is noise. Randomness. Chance. Luck. Roll the dice again and the result would have been different. Extending the period over which you look at the results increases your confidence in deciding whether what happened was luck. Good and bad luck often tend to cancel each other out over time. Unless early luck gives a later advantage. Finally, as the warning says, the data only gives you a rough indication of whether they had skill, not whether they will have skill going forward. You have to get subjective. That is where the real information lies. For investment, you have to dive into understanding the people, processes and philosophy. At the end you are going to have to make a decision you believe in, and people will reasonably disagree.

Primogeniture was a way of making the decision of who to choose simple. The rules changed though. Laws and society evolved and it became much more possible for people to be able to manage small plots of land without fear of it being taken away from them. The State would protect the tribe. Adam Smith actually argued that smaller is better. Local decisions should drive the Invisible Hand. Quite often laws outlive the reasons they become useful. They get deeply wired into a culture and we do them without thinking why. It takes us time to unwind.

Meritocracy may be one of those things we need to unwind. Firstly since we are just pretending that it isn't deeply subjective. We only believe in Meritocracy when our guy wins. The idea of taking each person within a community and growing the skills, ability, and well being of everyone is much more attractive. As we move deeper into a world with enough, the rules change. We should change too.
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