Latticework of Mental Models: Matthew Effect

In April 2013, Little Brown, an American publishing company, released The Cuckoo’s Calling, a début novel by an obscure author called Robert Galbraith, who the publisher described as “a former plainclothes Royal Military Police investigator who had left in 2003 to work in the civilian security industry”.

The novel, a crime detective story, sold 1500 copies in hardback. Some even say that this number is the number of copies that were printed for the first run, while the sales total was closer to a meagre 500. Nothing surprising, as more than 90% of the books that are published worldwide, hardly sell more than couple of hundred copies.

But unlike others, something remarkable happened with Galbraith’s novel. Four months after it was first published, the sale skyrocketed by 4000 percent. This happened when it was revealed that Robert Galbraith was a pseudonym used by J.K. Rowling, author of Harry Potter series and United Kingdom’s best-selling living author.  (source: Wikipedia)

Calling her a successful author would be a huge understatement. Her books have sold more than 400 million copies.

J. K. Rowling isn’t the only one who has experimented with pseudonyms. Another famous novelist, Stephen King, published a handful of short novels under the pseudonym Richard Bachman. He wanted to test whether he could replicate his success again. Unfortunately the experiment confirmed his fears that his popularity wasn’t entirely a result of his talent.

“Come to the point dude”, you might want to say now.

My point is that the rich and famous have an advantage in attracting more fame and money. In other words, those who have more have an advantage in acquiring more. So it’s easier for the rich to get richer, for the famous to become more famous.

And this is the mental model that we are going to explore today. It’s called Matthew Effect. Now before you jump to the black-and-white world of deterministic reasoning, let me clarify a bit. I don’t mean to say that the rich and famous always get richer and more famous. They just have odds in their favour.

The term Matthew Effect was first coined by sociologist Robert Merton in 1968 and takes its name from a verse in the biblical Gospel of Matthew, pertaining to Jesus’ parable of the talents:

“For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken even that which he hath.”

I am sure you have grown up hearing a similar version of it – “The rich get richer, and the poor get poorer.”

Matthew was probably referring specifically to wealth but Merton argues that the same rule applies to success more generally. Simply put, an individual’s early success confers on him certain structural advantages that make subsequent successes much more likely, regardless of their intrinsic aptitude.

I distinctly remember one of the debates that I had with my college roommate. It was a time when I had overdosed on the self-help literature and strongly believed in the storyline – The hero (billionaire, entrepreneur, rock star, celebrity etc.) is born in modest circumstances and by virtue of his own grit and talent fights his way to greatness.

My roommate had a better worldview and argued that luck had a significant role to play in most runaway success stories. An initial advantage, however small, has the potential to turn the direction of future events, sometimes wildly.

It took me another decade, after that fateful discussion, to appreciate his point.

Malcolm Gladwell, in his wildly popular book Outliers, describes the case study on Canadian Ice Hockey in 1980s where the rules for admission into hockey leagues favoured people who were born in first quarter of the calendar year. Ice Hockey in Canada is what Cricket is in India, so you can imagine that luck (date of birth) had a huge role to play in a player’s career, success and fame. So players born in the months of January, February or March got headstart in their career.

Gladwell writes –

It is those who are successful who are most likely to be given the kinds of special opportunities that lead to further success. It’s the rich who get the biggest tax breaks. It’s the best students who get the best teaching and most attention..Success is the result of what sociologists like to call “accumulated advantage.”

Nassim Taleb, in his book Black Swan, argues –

This theory can easily apply to companies, businessmen, ac­tors, writers, and anyone else who benefits from past success. If you get published in The New Yorker because the color of your letterhead at­tracted the attention of the editor, who was daydreaming of daisies, the resultant reward can follow you for life. More significantly, it will fol­low others for life. Failure is also cumulative; losers are likely to also lose in the future, even if we don’t take into account the mechanism of demoralization that might exacerbate it and cause additional failure.

Again, every initial advantage doesn’t turn into success story. But whenever you see a successful person, don’t ignore the possibility that an initial advantage got him or her into series of events supported by positive feedback loop and over a period of time the accumulated advantage resulted in final outcome.

In a wonderful book Everything Is Obvious, the author, Duncan Watts, writes on the matthew effect –

…when we try to explain why some individual is rich or successful common sense insists that the outcome arises from some intrinsic quality of the object or person in question. A best-selling book must be good some-how or else people wouldn’t have bought it. A wealthy man must be smart in some manner or else he wouldn’t be rich. But what the Halo Effect and the Matthew Effect should teach us is that these commonsense explanations are deeply misleading. It may be true that abjectly incompetent people rarely do well, or that amazingly talented individuals rarely end up as total failures, but few of us fall into those extremes. For most of us, the combination of randomness and cumulative advantage means that relatively ordinary individuals can do very well, or very poorly, or anywhere in between.

None of this is to say, of course, that people, products, ideas, and companies don’t have different qualities or abilities. Nor does it suggest that we should stop believing that quality should lead to success. What it does suggest, however, is that talent ought to be evaluated on its own terms.

The cynic’s question, if you’re so smart, why aren’t you rich? is misguided not only for the obvious reason that at least some smart people care about rewards other than material wealth, but also because talent is talent, and success is success, and the latter does not always reflect the former.

Matthew Effect in Knowledge acquisition

Imagine you’re sitting in front of Charlie Munger and both of you are silently reading the same issue of Economist. Can you guess who would end up with more insights at the end of this reading section?

That’s a no brainer, isn’t it? The obvious answer is Charlie Munger. With all due respect to your intelligence, unless you are Warren Buffett, there is nobody on this planet who can match Munger’s brilliance.

And I am not saying that because I am Munger fanatic. There is a strong reason behind my claim. Charlie is 92 and continues to read boatload of books every year. Not only he got an early start but he has been accumulating knowledge for more than half a century.

Matthew effect, simply explained in this context, would be a person with more expertise has a larger knowledge base, and the large knowledge base allows that person to acquire even greater expertise at a faster rate.

So the amount of useful insights that Charlie can draw from Economist would be quite high as compared to any other human being, and Munger would again end up becoming smarter at a faster rate.

As you learn to read more, your capacity to read even more and absorb more increases rapidly.

When I started reading books, most books didn’t make a whole lot of sense. But slowly I started finding connection between ideas spread across different books. These connections deepens understanding of those ideas and makes the brain more efficient and smarter to make sense of the new information.

So start early to take advantage of Matthew Effect in your quest for acquisition of worldly wisdom.

Matthew Effect In Investing

What makes value investing versatile is that all the knowledge that you gain while studying businesses is cumulative. When you study a business, even if you end up rejecting it, you gain important knowledge about the industry in which that business operates and at the very least learn more about characteristics of poor businesses.

Once you have accumulated a certain amount of knowledge base, any incremental addition to that foundation increases the value of that knowledge base exponentially.

Noted value investor Mohnish Pabrai, in his book The Dhandho Investor, describes how his knowledge about oil shipping industry (which he gained while researching a stock that he eventually didn’t invest in) helped him find another bargain later. He writes –

I knew nothing about the oil shipping business, but was curious to find out more about the industry and why these businesses had such high dividend yields. I spent a few days studying Knightsbridge and the oil shipping business…Knightsbridge was making astronomical profits at the time, and the dividend yield went through the roof. But, of course, it was not durable or sustainable. At the time I studied Knightsbridge, I also took a look at half a dozen other publicly traded pure plays in oil shipping. Since the dividend could go to zero, Knightsbridge was an easy pass.

In investing, all knowledge is cumulative. I didn’t invest in Knightsbridge, but I did get a decent handle on the crude oil shipping business. In 2001, we had an interesting situation take place with one of these oil shipping companies called Frontline. Pabrai Funds had a 55 percent return on the Frontline investment and an annualized rate of return of 273 percent. Not bad for a near risk-free bet based on boning up on the nuances of oil shipping by reading a few documents.

So don’t worry if you haven’t found any businesses worth investing after spending months together analysing and rejecting couple of dozen stocks. If you keep at it, the day is not far when you’ll be connecting the dots faster than you imagined and thanking Matthew!

Conclusion

People who belong to the meritocratic school of thought believe that successful people must be more talented or must have worked harder than their less successful counterparts or at the very least they must have taken better advantage of their opportunities.

But the worldview that it is the best and the brightest who always rise to the top is much too simplistic.

Matthew effect is an important mental model to add to your latticework. It gives you an edge in looking at the real world in rational and objective way.

When you’re trying to make sense of the world around you, don’t try to explain things by thinking of one reason and then latching on to it. Big outcomes are rarely caused because of one reason. Ask “what else can cause this outcome.”

The “what else” is where latticework of mental models comes to your rescue.

When you develop a knack for jumping over jurisdictional boundaries of multiple disciplines, you will be richer – both financially and intellectually.

Take care and keep learning.