Friday, November 2, 2012

Outperforming Your Baseline

In the United States, parents are the most significant determining factor for how successful any given person will be. For the first 18 years of a person's life, their parents are the gatekeepers for everything. They determine where a child lives, what and how much they eat, where they go to school, when to go to bed, where they vacation, who they hang out with.

What I just described is a measure of capital that a person has access to. Prior to adulthood, the amount of capital a person can leverage is almost completely dependent on who their parents are. This is essentially a modified version of President Obama's "you didn't build that" philosophy. No man is an island. No man makes it on his own.

However, that doesn't mean that getting help from other people is a guarantee of success. There will always be people who outperform or underperform their expectations. The question is what are the expectations for a given person, and how do we know whether they meet that expectation, exceed it, or undershoot it?

We can determine the expectations for a person by finding their baseline. The baseline is determined from their parents. For example, a person born to two college graduates will most likely go to college and graduate with a degree. A person born to a single mother who's a high school dropout will most likely not go to college and probably drop out of high school as well. A person born into a rich family where both parents hold at least a professional degree (MD, MBA, JD, etc) will probably earn a professional degree and make lots of money.

So the expected value (expectation) of a person's adult life is a function of their baseline (what they start with) and effort (how much they put into making themselves successful). In mathematical terms, this is essentially a two variable function:

E (expectation) = f(x, y) where x equals baseline and y equals personal effort

So to be considered a success, you have to outperform your baseline. In the case of a child born to a single, drug addicted mother, if they go to college, graduate, and work as an accountant for the rest of their life, that's a massive success. Likewise, if a child is born to an orthopedic surgeon and a college professor and then turns into an addict who turns tricks for methamphetamine in the back alley of a fast food joint in the city, that's a massive failure.

Effort is something that's a lot harder to quantify. Just about everybody agrees that people have free will. There's a small minority that believes in determinism, which essentially states every action is a reaction to a previous action, turtling all the way down to some unknowable base state. But that's another story.

So let's describe effort as something which requires positive action on behalf of the individual to achieve something meaningful.This doesn't necessarily mean going to school and graduating. Your parents could have forced you to into the best school and gotten you the best tutors to all-but-ensure your graduation from a good high school and entry into a tier 1 public school.

Effort has to be some action you take that your baseline doesn't already provide for you. In the case of the child born to the surgeon and the professor, it would be something like graduating college (parental control drastically decreases once their kids go to college), or for the child born to the drug addicted single mom, it would be graduating high school and attending college.

But there is nothing that requires more independent effort than starting and sustaining a small business. The hours are long. The pay isn't good (many owners reinvest all their profits back into the business). And the stress is monumental. Making payroll, rent, and utilities are things that business owners have to constantly worry about. Most businesses fail within the first 5 years. And many will languish as a small outfit just barely making ends meet. Creating a successful business is no small feat. And it is one of the most grueling individual efforts that a person undertakes.

There are plenty of kids that start at a high baseline and then go on to be another career-track salaried employee. That's not succeeding. That's meeting expectations. Creating and maintaining a successful business is outperforming your baseline any day of the week.

They didn't build the roads and bridges, but let's face it. We all use roads and bridges. We don't all own businesses.

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