It's now clear who the rich are in America — and it's not who you'd think.
A groundbreaking 2019 study by four economists, “Capitalists in the 21st Century,” analyzed anonymized data on every American taxpayer to determine who makes up the top 0.1% of income earners.
The study doesn't look at a few big-name tech or shopping millionaires, but at more than 140,000 Americans who make more than $1.58 million a year. The researchers found that the typical wealthy American is, in their words, the owner of a “local business” such as a “car dealership” or a “drinks store.”
This was a shocker. Over the past four years, in the course of researching my book on how insights buried in big data sets can help people make decisions, I've read thousands of academic studies. Rarely do I read a piece of text that changes the way I see the world. This was one of them. I never thought running a car dealership was a way to get rich, and I didn't even know what a beverage distributor was.
What lessons can we learn from the data on the wealthy?
First, the wealthy own things. The researchers found that the top 0.1% of people are about three times more likely to derive most of their income from business ownership than from a salary. Salary doesn't make you wealthy as easily as stocks.
Second, rich people tend to own less attractive businesses. Another study by statisticians Tian Luo and Philip B. Stark looked at which businesses go out of business the quickest. Record stores are most likely to go out of business the fastest: their average lifespan is just 2.5 years. (For comparison, the average lifespan of a dental clinic is over 19.5 years.) Other businesses that go out of business quickly include toy stores (3.25 years), clothing stores (3.75 years), and cosmetics stores (4.0 years).
But there are also plenty of less glamorous businesses that are making a few people rich. These include auto repair shops, gas stations, and commercial equipment contractors.
The third key element to wealth is how to avoid ruthless price wars and establish local monopolies. The fact that car dealership owners are overrepresented in the top 0.1% gives us an idea of what it takes to become wealthy.
Comparing data from the economists' study's appendix with data from the Census Bureau's SUSB annual data tables, it's estimated that more than 20 percent of U.S. car dealerships have owners who earn more than $1.58 million per year.
Car dealerships have legal protections, and state franchise laws often give them exclusive rights to sell cars in certain areas. So do many beverage distributors, who act as intermediaries between alcohol companies and retail stores and supermarkets. Beverage distributors have long been protected by a system established after Prohibition that prohibited beverage companies from distributing their own products.
Of course, knowing this, if you try to buy someone else's car dealership, you might not fare so well. Car dealership owners know how lucky they are.
Is there a business that tends to make people wealthy and that you are more likely to succeed in?
My data-based advice for getting rich with strong analytical skills and deep field experience is to start a market research business. Write reports using your domain expertise and sell them widely, charging top dollar to people you know in the field. I estimate that more than 10 percent of market research business owners are in the top 0.1 percent.
If pop culture is right, getting rich is the path to happiness. But is that true? Does money really make people happy?
Just as anonymous tax data has been made more widely available to researchers in recent years, leading to reliable studies of what actually makes people wealthy, new data sources over the past decade have provided a wealth of insight into what actually makes people happy.
And money is not a surefire path to happiness. Matthew Killingsworth of the University of Pennsylvania looked at data from more than 30,000 adults, far more than any previous study on money and happiness. He debunked the common myth that money has no effect on happiness above $75,000 a year, but confirmed the law of diminishing returns for money. Eventually, Killingsworth found that the effect of money plateaus, meaning you have to keep doubling your income to get the same level of happiness.
A study of thousands of millionaires by researchers at Harvard Business School found that happiness increases once you have a net worth above $8 million, but the effect is small: At that level, happiness increases by only about half the amount that marriage increases.
Besides getting married, what else tends to make people happy?
In my opinion, the most important happiness study is the Mappiness Project, started by British economists Susana Murat and George McKerron. The researchers messaged tens of thousands of people on their smartphones, asking them simple questions: Who are you with? What are you doing? How happy are you?
From there, the researchers constructed a sample of more than 3 million data points, an order of magnitude higher than any previous study of happiness. So what do 3 million happiness data points tell us?
Activities that make people happiest include sex, exercise, and gardening. Being with a romantic partner or friend significantly increases happiness, but being with other people, such as coworkers, children, or acquaintances, does not. Weather has little effect on happiness, although special occasions, such as sunny days with temperatures above 75 degrees Fahrenheit, can greatly improve mood. People always feel happier when they are in nature, especially near water, especially when the view is beautiful.
The findings regarding happiness data are honestly pretty clear. When I told friends about these studies, the most common response I heard was, “Did we really need a scientist to tell us this?”
But I would argue that the clarity of the data on happiness has profound implications.
Big data sometimes reveals shocking secrets. And sometimes it teaches us that there are no secrets at all. Happiness is a perfect example of this.
This is an important thing to keep in mind because many of us aren't doing the obvious things that make people happy. We're falling into traps that the data shows are unlikely to make us happy.
Many of us work too hard at jobs with people we don't like. This is not the path to happiness. Dr. McCarron and economist Alex Bryson found that work is the second most miserable activity; out of 40 activities, only being sick and in bed makes people more miserable. Economist Steven Levitt found that people who were unsure about whether to quit their jobs could be nudged to do so. And when they did, they reported increased happiness a few months later.
Many of us move to big cities and spend less time in nature, but this is not a path to happiness. A study by economists Ed Glaser and Josh Gottlieb ranked the happiness of each major metropolitan area in the United States. New York City was found to be nearly the least happy. Boston, Los Angeles, and San Francisco also scored poorly. The happiest places include Flagstaff, Arizona; Naples, Florida; and nearly all of Hawaii. And when people move from unhappy cities to happy places, they report increased happiness.
Many of us spend hours on social media, but this is not the path to happiness. The Mappiness project found that out of 27 leisure activities, social media ranked last in terms of happiness. In a randomized controlled trial of the effects of social media, people who were rewarded to stop using Facebook reported more time spent socializing and higher subjective well-being.
Big data tells us that there are some very simple things that make people happy, some that have been around for thousands of years. After reading all the studies on happiness, I have concluded that modern happiness research can be summed up in one sentence. Jokingly, we might call that sentence the data-driven answer to life.
Here's the data-driven answer to life: having sex with the person you love on a sunny, 80-degree day, overlooking a beautiful body of water.
It's a lot easier than running a car dealership.
