Sample bias in Thomas Piketty’s book is worse than I thought

In this blog posting from May 23, I pointed out an obvious flaw in Thomas Piketty’s Capital in the Twenty-First Century, i.e., that he calculates investment returns for the uber-rich by looking at different people who happened to make the Forbes list at different times. It turns out that a careful analysis by Stan Veuger in U.S. News and World Report was published a week earlier. Veuger follows the top 10 folks (a.k.a. “rich bastards”) from 1987 and finds out that they earned only about a 0.5-percent real return on their investments, i.e., less than what a consumer who bought and held an S&P 500 index fund would have earned. Piketty’s call to action is premised on the idea that rich people and/or rich organizations can get exceptionally good investment returns, but he has not put forth any good data to support that idea. (And even if he were right, he would have to adjust for the fact that a lot of middle class people have their money in pension funds and other professionally managed aggregations that should, in theory, have the same access to investments as the wealthiest individuals.)

[One of the largest investors in the U.S. is CalPERS, with more than $250 billion in assets and 2600 employees. Their year-end 2013 report shows that they achieved a 7.91% annual return over a 20-year period. What about a regular Joe who parked his money in a Vanguard S&P 500 fund? This calculator shows an investment held from January 1, 1994 through December 31, 2013 would have grown at 9.22%.]

Separately, Martin Feldstein published an article in the Wall Street Journal about how changes in the tax code led people to tear down Schedule C corporations and build S corps and LLCs instead. The real economy and real income/wealth distribution didn’t change that much, but individual tax returns changed dramatically in response to dramatic Reagan-era changes in the tax code.


  1. Izzie L.

    July 7, 2014 @ 1:55 pm


    If I recall correctly, the Harvard University endowment has fairly consistently outperformed the market over almost all measuring periods.

    I would not expect Calpers to outperform, first of all because it is so big. There are both economies and diseconomies of scale and at some point the latter outweigh the former – there are only so many stellar opportunities and you are not going to find good places to park all of $250 billion. 2nd because as a government entity its investment decisions are influenced by politics rather than maximum return.

    I am involved with private equity and almost all new private ventures (and some publicly traded ones) are structured as LLC’s or S corporations rather than C corporations – you would have to be a fool to volunteer to sign up for double taxation (C corp. income is taxed once at the corporate level and again when it is distributed as dividends to shareholders).

  2. philg

    July 7, 2014 @ 2:07 pm


    Izzie: Picking the richest and most prominent college and saying “this proves that an endowment manager can outperform the market” is another good example of sample bias. If Harvard had consistently underperformed since the 1950s, as many other schools have, it would not be a rich and prominent college today.

    Your comment is equivalent to saying that “Sam Walton’s success shows that anyone can make a lot of money in retail”.

  3. valueprax

    July 7, 2014 @ 3:15 pm


    Izzie, but would you expect the S&P500 to outperform CalPERS? It’s even bigger, of course.

  4. Izzie L.

    July 7, 2014 @ 4:21 pm


    How is this different from your saying “Calpers proves that no one can outperform the market”?

    Could it be that the way that Harvard has sustained itself in the top ranks is possibly thru the unethical means the Piketty refers to?

  5. philg

    July 7, 2014 @ 4:41 pm


    Izzie: How is it different? I picked CalPERS because it is the biggest investor that I could think of. CalPERS is big because (a) they manage pensions for a large number of people, and (b) those people have been awarded exceptionally large pensions by California politicians. In other words, CalPERS is not big because there were 100 other funds and CalPERS happened to outdistance the others via the magic of the Gaussian distribution. After picking CalPERS to examine, then I looked at the return.

    You picked Harvard because, presumably, you’d heard of Harvard rather than the 100+ other universities that have been managing endowments over the past century. But one of the reasons that you have heard of Harvard is that they made some good (and/or lucky) choices in the past, thus growing richer than other schools. (Albeit, shows that Harvard underperformed the S&P 500 so badly from 2009-2013 that the endowment would today be worth $44 billion instead of $33 billion if they had fired all of their managers and parked the money with Vanguard.)

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