Why Wealthy Families Don’t Stay Wealthy

Despite society’s relentless march towards tolerance and progressiveness, wealth is still a taboo topic for many. Certainly, we can talk about the 1% vs the rest of us, but personal finances are still not game for polite conversation. Perhaps it should come as no surprise, then, that most wealthy families tend to lose their money throughout the generations. Indeed, 70% of wealthy families (defined as those with more than $3 million in investable assets) lose their wealth by the second generation and a stunning 90% by the third, according to an article in Time. Despite the lack of family discourse on wealth, there seem to be other more important factors at play.

We can see numerous examples of such dynastic decline throughout history. Perhaps the most prominent is the story of the Vanderbilt family. At the time of his death in 1877, Cornelius Vanderbilt had amassed $100 million ($200 billion when accounting for inflation). His wealth stemmed from the steamship and railroad empire he began building in 1810. At a family reunion in the 1970s with 120 Vanderbilt descendants in attendance, not a single millionaire was present. Indeed, CNN anchor Anderson Cooper, a 6th-generation descendant, had to build his career from scratch, which he did by forging press passes in Myanmar to gain access to exclusive reports.

Vanderbilt University is one of the last remaining legacies of the family’s wealth.

Another famous family that fell apart was the Woolworths. Frank Woolworth, founder of the department store chain, left the business to his granddaughter Barbara. She spent over $500 million on art, jewelry, and her seven separate husbands. She gave lavish gifts to strangers. Other than most of her husbands exploiting her for her wealth, Hutton also suffered from several psychological conditions, as well as drug and alcohol, that left her vulnerable. Her son died in a plane crash in 1972, leaving no one competent to manage the fortune, which Barbara completely depleted.

The list goes on. Many researchers ascribe these collapses to two main causes: sudden wealth syndrome and affluenza. Sudden Wealth Syndrome is a catch-all term describing the mental state of individuals who suddenly come into large sums of money, like lottery winners or heirs. Becoming suddenly wealthy creates radical changes in a person’s life and can cause cause inordinate levels of stress. The “symptoms” of Sudden Wealth Syndrome include feeling isolated from former friends, feelings of guilt over good fortune, and an extreme fear of losing all their money. These strong emotions can, in fact, lead people to make awful choices that result in the loss of wealthy they feared.

Described in Affluenza: The All-Consuming Epidemic, affluenza refers to “a painful, contagious, socially transmitted condition of overload, debt, anxiety, and waste resulting from the dogged pursuit of more.” The inability to understand the consequences of one’s actions because of financial privilege is one of the biggest consequences of the condition. This disconnect between a person with affluenza and reality leads to poor decision-making. Take, for example, the case of Ethan Couch, a Texas teen who was spared jail-time because he needed “rehabilitation” for his affluenza. Psychologist Robin Rosenberg has argued that the affluenza defense makes no sense because Couch could have learned that bad behavior has consequences in other areas of his life, and that a sentence to a luxurious rehabilitation home reinforces the message that his “wealth and privilege can obviate the negative consequences of his criminal behavior.”

While both Sudden Wealth Syndrome and affluenza play a role in the loss of familial wealth, I think the cause is something else altogether. In statistics, regression to the mean is the phenomenon that if a variable is extreme on its first measurement, it will tend to be closer to the average on its second measurement. If the family member who creates wealth is an outlier in the population (i.e. extraordinarily smart, charismatic, etc.), there’s a big chance that his/her children will regress toward the mean; that is, they’ll end up being average. These average people are more likely to lose wealth than create it.

Traits Graph

Furthermore, when you’re at the top, it’s far easier to fall than to maintain your standing. The intuition behind this actually comes from calculus and population dynamics. Consider an S-curve, the function by which a population grows exponentially, slows down, and then plateaus out at the environment’s carrying capacity. The derivative graph of the S-curve basically shows us the same normal distribution from above. There’s more space to be average than to be exceptional, so it’s no surprise that people tend to fall from wealth.

The red graph shows the derivative of the blue graph. Note that, at the point where the growth rate starts declining, the derivative graph faces a drop.

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