Is wealth inequality so extreme that it’s OK to be a ruthless trader?

U.S._Distribution_of_Wealth,_2007
Wealth inequality globally is incredibly high. Perversely, this can be an argument in favour of working in finance.

Many people are concerned that ‘earning to give’ in the financial industry is overall harmful for the world, even if you give away most of your income to outstanding charities.

To figure out if this is true, we have been researching the size of the harms, and benefits, caused by finance. (Though please note 80,000 Hours is not just about earning to give and in fact we think it’s the best path for only a small share of our readers.)

One of the concerns we’ve investigated is that certain parts of quantitative finance are a socially-useless competition between traders that only changes who gets some amount of income, not that someone gets it.1 I think this is the case, but the incredible amount of inequality in the world makes this argument against working in finance fairly weak.

If you are working in ‘low-latency arbitrage’, make a random clever trade on a stock exchange and beat some other trader to a profit by 1 millisecond, whose pocket is this money coming from? A poor African farmer? No, they have no wealth to take. A middle class American family? It’s possible, but most of their wealth, if they have any, is probably in their house or bank account.2

We don’t have perfect figures here, but looking at reasonable estimates, you’re more than 80% likely to be competing against someone in the top 0.1% of global wealth – people so wealthy it scarcely matters if what they earn on their savings is any higher or lower. One estimate, that tries to take into account wealth being hidden from tax authorities, is that 30% of the time you’ll be taking money from someone in the richest 1 in 100,000 in the world!3

The vast majority of the wealth being actively traded in financial markets, often by automated algorithms, is owned by the extraordinarily wealthy. The vast majority of people in the world will never have the resources to be constantly placing orders on the stock market.

This means you can compete to fund your donations to the world’s poorest people without much remorse. A quantitative trader who gives to GiveDirectly might be the clearest example of a (legal) Robin Hood in the modern world. The more you feel that the super rich don’t deserve their wealth, the more justifiable it is to work to ‘arbitrage’ it away penny by penny and hand it to those in poverty.

Now this doesn’t mean that working in finance is actually fine – this is only one possible objection, to a particular kind of trading. The much more compelling concern to me is that excessive attempts to lend by financial institutions leads to a higher frequency of financial crises, which are horrible for people’s wellbeing. If someone were engaged in the kinds of activities that have created financial crises before – externalising risk to governments because the firm they work for is ‘too big to fail’, or working on fraudulent or near-fraudulent lending – I would much prefer that they left finance and stopped giving. I would also suggest they blew the whistle on anything illegal or troubling they observed.

But the concern that you are pointlessly taking from other people in the market doesn’t keep me up at night. The people you’re typically taking from are so rich that ‘drinking their milkshake’ is more neutral than harmful.

Notes and references

  1. The classic case of this is the arms race in ‘low-latency trading’: firms will compete to trade 1 millisecond faster than their competitors in order to take profitable trades slightly before someone else does. I feel confident that this is a socially unproductive activity. There is not real value in speeding up the correction of prices by a further millisecond, because nobody makes real economic decisions on that timescale.
  2. If we restrict ourselves to the USA alone we have better data on inequality in stock ownership. There’s no reason to look at the USA alone, because a huge amount of American assets are owned by foreigners, and the transfers you can make to people in poverty are to the poorest people in the world. Globally wealth inequality is going to be dramatically higher, because we will be including billions of people who are far below the US median. Nonetheless, this can give a firmer lower bound on total wealth inequality.

    There, 38.3% of stocks are owned by the top 1%, and 81% by the top 10%. This includes indirect ownership through pension funds.

    See Table 9. The Percent of Total Assets Held by Wealth Class, 2007 in this report from the Levy Institute.
  3. You’ve probably heard figures showing that the distribution of income is extremely unequal, and that is true - our sister project Giving What We Can has a great calculator that documents this. But that is nothing compared to the inequality in the distribution of accumulated wealth, because people with modest incomes usually hardly save.

    And even that is nothing compared to the inequality in who trades on financial markets: even most rich Americans, in the top few percent of global wealth, have most of their assets tied up in bank accounts and houses, which are not actively traded.

    See more in Inequality, you don't know the half of it from the Tax Justice Network.

Author: Robert Wiblin

Rob studied both genetics and economics at the Australian National University (ANU), graduating top of his class and being named Young Alumnus of the Year in 2015.

He worked as a research economist in various Australian Government agencies, and then moved to the UK to work at the Centre for Effective Altruism, first as Research Director, then Executive Director, then Research Director for 80,000 Hours.

He was founding board Secretary for Animal Charity Evaluators and is a member of the World Economic Forum’s Global Shapers Community.