Mind the Gap: Inequality and Diversification

6 Pages Posted: 1 Jan 2020

Date Written: December 11, 2019

Abstract

Understanding the origins of wealth inequality is critical in the debate over what, if anything, to do about it. In this note, we propose a simple model which is still rich enough to reproduce observed patterns of wealth inequality. We call it the Concentrated Asset Betting (CAB) model. A key element of CAB is a phenomenon known in the gambling world as “over-betting the edge.” The model we propose is based on the observation that a high fraction of investors have experienced sub-par growth in their savings, after allowing for consumption and philanthropy, relative to the tremendous long-term growth in the public stock market. Some of the reasons put forward to explain the shortfall in investor returns include investment fees, commissions and taxes. Our model suggests there may be something even larger and more insidious at work – pervasive and systematically poor money management.

Keywords: wealth inequality, diversification, Concentrated Asset Betting

JEL Classification: B12, B16, B20, C00, C10, C11, C50, C57, C73, D03, D81, D83, E00, G00, G02, G11, G12, G14, G17, G23

Suggested Citation

White, James and Haghani, Victor and Rosenbluth, Jeffrey, Mind the Gap: Inequality and Diversification (December 11, 2019). Available at SSRN: https://ssrn.com/abstract=3502522 or http://dx.doi.org/10.2139/ssrn.3502522

James White (Contact Author)

Elm Partners ( email )

1630 Willow View Drive
PO Box 1417
Wilson, WY 83014

Victor Haghani

Elm Partners ( email )

1630 Willow View Drive
PO Box 1417
Wilson, WY 83014

HOME PAGE: http://www.elmfunds.com

Jeffrey Rosenbluth

Elm Partners ( email )

1630 Willow View Drive
PO Box 1417
Wilson, WY 83014

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