The Rich Are Not Who We Think They Are. And Happiness Is Not What We Think It Is, Either.
May 14, 2022By Seth Stephens-Davidowitz
Mr. Stephens-Davidowitz is the author of “Don’t Trust Your Gut: Using Data to Get What You Really Want in Life,” from which this essay is adapted.
We now know who is rich in America. And it’s not who you might have guessed.
A groundbreaking 2019 study by four economists, “Capitalists in the Twenty-First Century,” analyzed de-identified data of the complete universe of American taxpayers to determine who dominated the top 0.1 percent of earners.
The study didn’t tell us about the small number of well-known tech and shopping billionaires but instead about the more than 140,000 Americans who earn more than $1.58 million per year. The researchers found that the typical rich American is, in their words, the owner of a “regional business,” such as an “auto dealer” or a “beverage distributor.”
This shocked me. Over the past four years, in the course of doing research for a book about how insights buried in big data sets can help people make decisions, I read thousands of academic studies. It is rare that I read a sentence that changes how I view the world. This was one of them. I hadn’t thought of owning an auto dealership as a path to getting rich; I didn’t even know what a beverage distribution company was.
What are the lessons from the data on rich earners?
First, rich people own. Among members of the top 0.1 percent, the researchers found, about three times as many make the majority of their income from owning a business as from being paid a wage. Salaries don’t make people rich nearly as often as equity does.
Second, rich people tend to own unsexy businesses. A different study, by the statisticians Tian Luo and Philip B. Stark, examined which businesses were most likely to fold fastest. The kind most likely to go out of business most quickly is a record store. The average record store lasts just 2.5 years. (For comparison, the average dentist’s office lasts more than 19.5 years.) Other businesses that fold quickly include toy stores (3.25 years), clothing stores (3.75 years) and cosmetics stores (4.0 years).
There are, however, plenty of unsexy businesses from which a few people are getting rich. These include auto repair shops, gas stations and business equipment contractors.
The third important factor in gaining wealth is some way to avoid ruthless price competition, to build a local monopoly. The prevalence of owners of auto dealerships among the top 0.1 percent gives a clue to what it takes to get rich.
Comparing data from the appendix of the economists’ study with data from the SUSB Annual Data Tables put out by the Census Bureau, I estimate that more than 20 percent of auto dealerships in America have an owner making more than $1.58 million per year.
Auto dealerships have legal protections; state franchising laws often give auto dealers exclusive rights to sell cars in a territory. Same for many beverage distributors, which act as middlemen between alcohol companies and stores and supermarkets. Beverage distributors have long been protected by a system set up after prohibition that prevents beverage companies from distributing their products themselves.
Of course, if upon learning this you try to buy someone’s auto dealership, you may not have much luck. Owners of auto dealerships know how good they have it.Is there any business that tends to make people rich that you might have a better shot at?
My data-driven advice for getting rich for someone with good analytical skills and deep experience in a field is to start a market research business. Use your specialized knowledge in the field to write up reports; sell them widely and charge a fortune to your contacts in the field. I have estimated that more than 10 percent of owners of market research businesses are in the top 0.1 percent.
If pop culture is right, getting rich is a path to happiness. Is that true? Does money actually make people happy?
Just as anonymous tax data, which has been made widely available to researchers only in the past few years, has led to credible research on what actually makes people rich, new sources of data in the past decade have given us many insights into what actually makes people happy.
And money is not a reliable path to happiness. Matthew Killingsworth of the University of Pennsylvania has studied data from more than 30,000 adults, far larger than previous studies of money and happiness. He debunked a popular myth that there is no effect of money on happiness beyond $75,000 per year, but he did confirm a law of diminishing returns to money. In the end, Dr. Killingsworth found, the effects of money level off: You need to keep doubling your income to get the same happiness boost.
A study of thousands of millionaires led by researchers at Harvard Business School did find a gain in happiness that kicks in when people’s net worth rises above $8 million. But the effect was small: A net worth of $8 million offers a boost of happiness that is roughly half as large as the happiness boost from being married.
What, in addition to being married, tends to make people happy?
The most important happiness study, in my opinion, is the Mappiness project, founded by the British economists Susana Mourato and George MacKerron. The researchers pinged tens of thousands of people on their smartphones and asked them simple questions: Who are they with? What are they doing? How happy are they?
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