Game Theory #3: Rich Dad, Poor Dad

Today we look at the question of success: who succeeds and why? We've done a lot of research and discovered that people who succeed do so for certain reasons.

The Marshmallow Test: Delayed Gratification and Self-Control

There is a Columbia psychologist named Walter Mischel, and he devised a very famous experiment called the marshmallow test. The marshmallow test is very easy. Imagine a room where I invite a four-year-old or five-year-old to come in and have a conversation. I ask him, "How's your mother? What do you like to do?" and it's a very good conversation.

Then suddenly I get up and say, "I'm really sorry, but I need to go across the hallway for another meeting, but I'll be back. Just wait for me. And here, I'll make you a deal. Here's a marshmallow. I'm going to put a marshmallow in front of you, and you can have it right now. But if I come back and the marshmallow is still there, I will give you two marshmallows."

Then Walter Mischel goes away and watches from behind a see-through mirror. He's able to see the students as they struggle to contain themselves because, obviously, they want two marshmallows. Some students can, in fact, resist the temptation to eat the first marshmallow. But then there are others who cannot.

Walter Mischel would spend 50 years just tracking them. What he discovered is this: the students who resisted the temptation and got the second marshmallow were much more likely to do better in school. They had higher test scores. They had better, more stable careers and got promoted. They were much more able to find a stable relationship. They avoided jail, drugs, and alcohol. They were more lean, more fit, lived longer, and had better teeth. Those who could not resist and ate the first marshmallow right away had the opposite effect.

For Walter Mischel, success means delayed gratification. All this means is that people who succeed are capable of long-term planning. To succeed today, I will make the necessary sacrifices. If my friends are playing outside and I need to do my homework, I'm going to stay home and do my homework. This long-term planning is what he calls delayed gratification. A much simpler way of saying this is the idea of self-control or emotional regulation. You're able to keep your emotions in check. If you're angry, you're able to calm yourself down. We know about this, and that's why in school we focus on the idea of emotional regulation, teaching you how to better control your emotions and how to do long-term planning.

The Growth Mindset: Resilience in the Face of Failure

Another theory of success comes to us from another psychologist named Carol Dweck, who is at Stanford and wrote a book called Mindset. What she tells us is that those who succeed in life have a growth mindset, and those who fail in life have a fixed mindset.

The idea is resilience. Those with a growth mindset, if they fall or they fail, say to themselves, "This is an opportunity for me to learn, so I'm going to think about what I did wrong. Next time I'll do better." People with a fixed mindset cannot accept the idea of failure. They think it's because they're not capable of improving, and therefore they give up. Those with a growth mindset, if they fail, try harder. Those who have a fixed mindset, if they fail, just give up. It's the idea of resilience.

Deliberate Practice: The Strategy of Success

The third idea of success comes to us from K. Anders Ericsson, who is a Swedish psychologist. He wanted to know why certain people are able to succeed as musicians or athletes, and he created the idea of deliberate practice.

What he found is that people who want to become athletes or musicians work really hard. They practice every day. But the people who succeed practice strategically. Those who just work hard work a long time. But those who work strategically have a plan. The plan is this:

1. What are my goals?
2. How can I achieve these goals?
3. How do I improve my plan?

They're examining their own practices and trying to figure out where the weaknesses are and where they can improve. They create a plan on how to improve and then follow it. If this plan helps them improve, they stick to it. But if the plan doesn't really work, they change the plan as well. This is the idea of self-reflection or self-assessment—constantly thinking about how you are as a student and figuring out how to improve your own learning strategies. What K. Anders Ericsson discovered is that if you do this, you'll succeed at anything.

The Dunning-Kruger Effect: The Inability to Self-Assess

This is true, and the reason we know it's true is because of two American psychologists named David Dunning and Justin Kruger, who discovered something called the Dunning-Kruger effect. They ran an experiment with 500 students in their first-year university psychology class. They made every student take an IQ test. After they took the IQ test, they asked each student, "How do you think you did on the IQ test? Do you place in the top 5% or the bottom 5%?"

It turns out that no one got the ranking correct. Those who were in the top 5% in terms of IQ thought they were maybe in the top 20%. Because for them it was easy, they assumed it was easy for everyone else as well. But what was dramatic is that those who scored the lowest thought they were average. The worst 5% in the class thought they were in the top 50% or just average.

The reason why is that those people who are stupid lack the capacity to know they're stupid.

What Dunning and Kruger discovered is that the hardest part of being a student is to assess yourself properly—to know exactly where you stand and how to improve. Those who are stupid are often the most confident in the world. That's what's called the Dunning-Kruger effect. This helps explain why the world is the way it is, because often the people in power are stupid, they don't know they're stupid, they are confident, and they do stupid things, like Donald Trump.

So now we have these three theories: self-control, resilience, and self-assessment. As educators, as schools, we can devise strategies and curriculum to help all students succeed. Correct? The problem is that when we actually try this, it doesn't work. If you take a bad student and you teach him self-control, resilience, and self-assessment, the student doesn't actually get better.

Correlation Does Not Equal Causation

The reason why—and this is a very important idea for you guys to remember—is that correlation does not equal causation. Just because things are correlated does not mean they cause each other.

For example, we know that successful people get up early in the morning. They get up at four o'clock in the morning. But just because you get up at four o'clock in the morning does not mean you'll succeed. Just because you work hard, are resilient, or have a growth mindset does not mean you'll succeed.

But if you're successful, you will get up early in the morning because you are more motivated. If you are successful in life, you will have more self-control. You will have more resilience. You will be more humble. If you're rich, guess what happens? You become successful, and therefore you will have a growth mindset, self-control, and use deliberate practice. But just because you have a growth mindset, deliberate practice, and resilience does not mean you'll succeed.

So the question for us is, why does this happen and ultimately, who succeeds?

The Real Predictor: Parenting and Socioeconomic Status

We know for a fact that rich people are much more likely to succeed than poor people. In fact, what we know from macroeconomic studies is that school doesn't really matter. It doesn't matter how well you do in school. If your parents are rich, you'll be successful in life. If your parents are poor, you will not be successful in life.

So, what's the difference? Let's look at parenting strategies between the rich and poor. There are lots of differences, but let's focus on three major ones.

The first major difference is that rich parents speak to their kids more than poor parents. When rich parents speak to their kids, they will use higher vocabulary and longer sentences. Poor parents will just say, "No," "Yes," "Go away."

Another major difference is in attitude. Rich parents use a friendly attitude, and poor parents use an authoritarian or command attitude. For example, if you are a rich kid and you go and touch a stove and burn your hand, the rich parent will say, "Listen, you made a mistake. Don't worry about it. Let me explain to you why touching a fire is bad for you. You'll burn yourself, you might have to go to the doctor, and we will feel pain if you hurt yourself." The rich parent will spend a lot of time explaining to the child why this is wrong and how not to do it again. The poor parent is like, "Don't you ever do that again or I'll beat the crap out of you. Don't do that."

As you can understand, the rich kid will understand that the world is safe and that he is respected. The poor child will think that the world is scary and he or she must be afraid of adults. This carries on into school. As a rich kid, you go into school and think, "Oh, my teacher is my friend." So you smile at the teacher and hug the teacher, and the teacher smiles back, and now you're friends. But if you're a poor kid and you see the teacher, you're afraid to look at the teacher. You don't smile. You are stressed. And the teacher thinks that you might be a problem child. Yes, being an authoritarian parent is effective, but it creates stress in the family and makes the child feel unsafe.

This leads to our third major difference: rich parents offer stability, while poor parents can only offer volatility. This is a very simple idea. Rich parents have money, so they can afford to keep promises. If a rich parent says to their child, "Okay, next week we'll go to Thailand for vacation," guess what? Next week, you go to Thailand for vacation. But if you are a poor parent, money is always an issue, so it's hard for you to keep promises. It's like, "Next week, we'll go to McDonald's for lunch," but your paycheck isn't enough, so you're like, "Sorry, we can't go anymore."

Because of these different parenting styles, we understand why rich kids behave differently from poor kids. Let's look at the idea of self-control. What is the marshmallow test? The marshmallow test is not a test of self-control; it's a test of your trust in others. If you believe that the teacher who goes outside will come back and keep his or her promise, then you will not eat that marshmallow. But if you think that this teacher is lying to you, then you will eat that marshmallow. It's not really about self-control; it's about your belief and trust in authority figures. If you're rich, you have stability. But if you're poor, you don't have stability. So you're actually better off eating that marshmallow rather than waiting for the second one. Because guess what? Most of the time, you will not get that second marshmallow. It's not that poor kids are stupid. Poor kids are rational, and they're responding to the circumstances that they live in.

And resilience? The idea of resilience is that you believe the world will help you. If you're rich and you believe that everyone helps you, you can be resilient because if you fail, someone will help you get up. If you're poor and you fail, that probably tells you that you shouldn't be doing this. You probably won't succeed, so you don't have much confidence in others.

And the idea of self-assessment, looking inward? If you're a poor child who lives under a lot of stress, it's hard for you to be self-reflective because if you look back at yourself, all you think about is your pain and your stress.

From these different parenting strategies, we can now explain why different students behave the way they do. This may lead you to think that rather than construct our schools around self-control, resilience, and self-reflection, we should construct our schools around better parenting skills. Let's construct schools where kids are exposed to a lot of vocabulary, where teachers are friendly, and where there's a lot of stability. We've tried this, and it's more effective, but it doesn't really work either. Why? Because the kids come in too late. A lot of their worldview is already established. Then you're like, "Okay, well then let's change how parents behave." And when you do that, you recognize that you can't change how they behave either.

No matter what you do, you end up with massive differences between the poor and the rich. The rich stay rich, and the poor stay poor.

Why Parenting Styles Differ: The Hierarchy of Society

So now the question for us is, why is this the case? It's the case because society is a hierarchy, usually divided between the rich and the poor. These two worlds are night and day; they're very different.

As a poor person, if you want to survive, you have to obey authority. But if you're a rich person, the way that you get along with others and maximize your outcome is by negotiating with others. Negotiating can also mean debate or argument. Who should be the boss? Well, let's have a debate and present different evidence to figure out who should be the boss.

This helps us understand why different parents parent their child differently. If you're a poor parent, your responsibility is to make sure that your child knows how to obey authority. That's why you command your child. But if you are a rich parent, you want your child to be able to negotiate with authority. That's why you respect your child and teach your child how to debate, how to argue, how to negotiate with others. They live in different worlds.

From day one, rich kids know that they're playing a different game than poor kids.

The Game of Fitting In

Poor parents command their child, don't really communicate, and don't keep promises. The reason they do this is that they're not playing a game to improve their kids' outcome; they're playing a game to get along with other parents, colleagues, family, and authority figures like the police or their boss.

As a parent, you're trying to figure out how to negotiate with the police, with your boss, and with your family. If you're a poor person and the police know you're a poor person, the police are going to bully you. If you fight back, the police will probably put you in jail. So, it's very important that you accept authority. You don't challenge authority because if you do, you'll probably get into trouble. Your boss will just command you about, so it's very important that your child knows how to take orders rather than ask questions or debate. Your child must learn how to just follow orders or at least keep his mouth shut. And family is about maintaining good relations with those who can most support you, which often means sharing the same values. If your family members or your friends are parenting their child in this manner, you're also going to copy them through imitation. For a poor person, this is the optimal strategy of how to parent.

If you choose to be a friend to your child, to communicate, to keep your promises, then your friends and your family will think that you're doing something wrong. They won't think, "Oh my god, you are an enlightened parent who's read a lot of parenting books, great for you." They're going to think there's something wrong with you.

Let me give you an example. My wife and I have three kids, and this is how we parent them. First of all, we give our child a lot of freedom. We don't have our kids do lots of activities. We don't send our kids to math class, swimming class, or piano class. We just let our kids run around and play. The other thing that we do is we communicate a lot with our child. We believe in democracy in our family. If we're going to make a decision together, we want everyone to communicate. The other thing that we do that's different is we tell stories; other Chinese families will do math.

We raise our children in a way that's very different from normal Chinese families. We do this because both my wife and I spend a lot of time talking about parenting. I've read a lot of books about parenting. I spent many decades researching the best education possible. And guess what? Because we do this, we have no friends in China. We have family, but they all think we're crazy.

But we do this because for us, what's most important is to make sure that our children are happy and healthy and that they have a chance to be creative and be successful in life. I think that if you do it the other way, the child will not be creative, will not be successful. But if you do it that way, your child will fit into China better.

The incentive for parenting is not for your child to succeed. The incentive is for your child to fit into the larger social environment that you are in. That's why it's very hard to change the way people behave, and that's why social structures are extremely rigid—because the game they're playing is often just to fit into their environment.

How can poor kids succeed and become like the rich parents you describe?

We know that there are certain poor kids who do succeed. For example, I'm a poor kid who succeeded. We immigrated to Toronto, Canada when I was six years old, and my father was a dishwasher, so we were a very poor family. But I succeeded because I left Canada for the United States. Canada is a very rigid place where poor people basically move up a bit but not too far. I was able to succeed because I was able to get a scholarship to go study in the United States.

So there are opportunities. The problem, though, is that it means leaving your community. One way to succeed is to abandon your community. But that's high risk. You have to be extremely individualistic to take such a risk. That's why most people don't do it. The safest option for you is to stay within your community; that's what's going to guarantee you the best outcome. But if you choose to abandon your community and just say, "You know what, I'm going to go somewhere else and try my luck," that's taking a really high risk. To succeed, you have to take high risks.

Another possibility is war. Historically, that has been the best mechanism of social mobility. When you go fight a war and you do really well, you'll get promoted in life. But again, war is high risk because chances are you'll get killed. Not just war, but also revolution.

And of course, the best way is to marry up. That's why in the dating game, women often want high-status men. If you're a woman, you don't want to marry into a low-status family because your children will be screwed over. Your best option is to take a risk and try to marry into a high-status family.

Traditionally, war and marrying up are the two major mechanisms of social mobility. In today's world, abandoning your community can also lead to success, which often means immigrating to a place that offers more social mobility, like the United States. But another way of saying this is you have to get really lucky.

There are lots of poor people who think, "I succeeded because I worked hard and I'm really talented." Look, I was born poor. I lucked into Yale. It's luck. You can work as hard as you want, but the chances are against you. It takes a certain personality—you're really individualistic, you're very ambitious, and you have high-risk tolerance. Most people don't have that. So yes, there are certain people who, despite their background, are able to succeed, but that's often the exception to the rule.

Can luck be counted as a kind of ability, or is it just coincidence?

You're absolutely right. Luck is a form of strategy. All this is saying is that you are trying to position yourself in a place that allows you to get lucky. I left Canada and went to the United States because I knew that in Canada, it doesn't matter how hard you work; no one cares. But in the United States, if you work really hard, then you might get lucky and meet someone who's like, "Wow, you're a really hard worker. I want to promote you."

So you're right in that yes, you can strategize and increase your luck, but it's still luck. Those who succeed are able to think strategically and far ahead and position themselves in a way that allows them to get lucky. They often have the characteristics that we talked about, like self-control, resilience, and the ability to look inward and better understand what you're good at. It takes a combination of factors, but the point I'm trying to make is that these people are a minority—1% of the population, really. And they still depend on luck.

Why Stable Systems Collapse: Elite Overproduction

The way that I've framed everything, you have the poor and you have the rich. They live in their own worlds and don't really connect with each other. They have different parenting strategies and different outlooks. The rich stay with themselves, the poor stay amongst themselves. This looks like a very stable system, or what we can use is the word equilibrium.

The question then is, why do societies collapse? Why are there revolutions? Why is there social change? This looks like a system of equilibrium where, because of parenting, people know their place and how to best strategize about maintaining it.

The reason why is that this system has problems. It's stable, but the main problem is the rich. The rich are taught from day one to negotiate a better outcome. Another way of saying this is that the poor aim for a minimum outcome, while the rich want the maximum outcome. The poor are like, "You know what, if I'm alive and I have a decent job, I'm okay." But the rich are like, "No, I need to be the top dog. I need to improve my lot in society, otherwise what's the point of my life?" They have high expectations, while the poor have low expectations.

This is a problem because power is a zero-sum game. Hierarchy is a zero-sum game. Only a few people can be at the top. Eventually, you get into a situation where there are too many rich people and not enough powerful positions. This is what's called elite overproduction.

What happens here is that in order to get power, certain factions of the rich will align with certain factions of the poor against the powers that be. All revolutions are always between the "have a lot" versus the "have some." It's never between the rich and poor.

The people who led the Chinese Revolution, people like Mao Zedong, Zhou Enlai, and Deng Xiaoping, were not poor people. They didn't come from poor families, but they weren't rich enough. The Chinese Revolution was really between the urban elite versus the rural elite—the "have a lot" versus the "have some." If you look at every revolution in human history, that's always been the case. If you go back to Chinese history and look at all these revolutions, they were always led by the middle class or the aspirational class, usually merchants. Merchants were discriminated against heavily in society, but they had money and they wanted to transform their money into power. When times were bad and people were looking for change, they took the initiative and led people into revolution.

How do elites lead the poor to start a revolution?

Revolutions are almost always the same. Over time, because of the inequality between rich and poor, certain problems arise. The most common problems are:

1. Indebtedness: Because the rich have a monopoly over wealth, the poor need to borrow money to survive. Over time, because of interest rates, the poor find themselves in slavery.
2. Slavery: If you can't afford to pay back the bank or the rich person, then your body is collateral. You become a slave, and not only you, but your children become slaves as well.
3. Landlessness: The poor get into debt, so they lose their land, and their children become slaves.

Because of interest rates, it's impossible for you to pay back that debt. Now you have a majority of people who have absolutely no incentive to live. So what happens is that an elite faction says to these people, "Follow me into revolution, and I will clear your debts. I will give you land, and I will end slavery." That's it.

Every single revolution has been like this, though with different names. For example, communists are like, "We'll create a communist paradise." What's a communist paradise? It's where debt is canceled, where people are given land, and where no one's a slave. Others are like, "We'll create a religious paradise." The Islamic Revolution was about this initially. Muhammad said to everyone, "We're going to create the kingdom of heaven." What's the kingdom of heaven? It's where people don't have debt, where people have land to feed themselves, and where there are no slaves. If you are a Muslim, you can never be a slave.

Look at every single revolution; it's this pattern. Over time, because of inequality, you have people who fall into too much debt, become slaves, and have no land. Then, because of elite overproduction, you have this faction that splinters off and, in order to obtain power, gets the people on their side. Look at the Roman Civil War. Why was Julius Caesar so popular? Because he was saying to the Roman people, "If I become king, I will get rid of your debt, I will free you of slavery, and I will give you land." That's why they had to kill him.

Why is Donald Trump so popular in America right now? Same thing. Americans are in debt to their credit cards, student loans, and their houses. They believe that if Donald Trump were to come to power, he would cancel all debts. What's the first thing a new king always does? Cancel all debts. Because if you cancel all debts, the rich lose power, and it's the rich who are most dangerous to a king.

The Role of Social Mobility

Social mobility is really the best form of governance. As long as you enable people with talent, ability, and ambition to climb up, they'll be happy, and your society will be very stable. Not only will it be stable, but it will be very prosperous and creative. It doesn't matter what system you have.

For example, America in the 1950s was a democracy with a lot of social mobility, so people worked really hard, and America became very wealthy. But in China in the 1950s, it was a communist system, but people worked really hard as well. Why? Because China was destroyed after decades of war, and there were lots of opportunities for social mobility. If you worked hard, you got promoted very quickly. Even though it was a communist system, people worked hard because they thought they could improve their lives. Social mobility is the best form of governance. You don't need democracy; as long as you have social mobility, people will be happy.

The problem is that over time, in less than a generation, all the positions of power are filled. The people with talent who made the country great and wealthy, when they get into power, they don't want people like them to replace them. They want their children to replace them. Over time, all the positions at the very top are filled, and there's a waiting list as well. So if you are a poor person who works hard and is really talented, unfortunately, all those positions at the top are filled already. Too bad.

Again, just look at Chinese history. At the beginning of a dynasty, you had all these talented people take the civil entrance examination, the keju. But then they have children, and they teach their children how to do well on the keju. Eventually, they're like, "You know what, we'll just cheat." So they corrupt the keju. Then eventually, it's "screw this, whoever can pay to pass the keju will pass." All the positions at the very top are filled, and there's no more social mobility. So what do people do? They engage in revolution.

Look at Hong Xiuquan. He failed the keju, or there was no position at the top for him, so he believed he became the brother of Jesus and started a revolution that claimed tens of millions of lives in China. Why? Because there was no social mobility for him. Fifty years prior, he would have been a civil servant. Same thing for Mao Zedong. By the time he became a university student, the keju had been eliminated, so there was no way for him to climb the ladder anymore. Therefore, he had to start engaging in new ideas.

Social mobility is the best way to maintain social harmony, but people have children, and they want their children to succeed. They will arrange a system in a way that only their children can succeed, which screws over everyone else. So others have no choice but to overthrow the system. This is a game reset.

This is what a revolution is. One hundred people are playing a game, ten people are winning and they keep on winning, and they can only win. So everyone else is like, "Screw this game, let's start a new game." The ten people are like, "Nope, we're happy playing this game." They can't agree, so the only thing the other ninety people can do is a revolution, which allows for a game reset, which now again allows for social mobility. That is the course of human history.

Either you climb up the ladder, or if they don't allow you to climb up the ladder, then you'll just break the game. But unfortunately, once you're in power, you want your children to inherit your power. You will rig the game in a way that only your children can succeed. That's why schools are the way they are. Schools for the rich are very different from schools for the poor. In schools for the rich, there's a lot of freedom, creativity, and the teachers are very good. You go to poor schools, and it's the complete opposite. The system is set up to make sure that certain people succeed and everyone else fails.