Because the talent that made them rich in the first place lies in something — television hosting, for example, or heavyweight boxing — that doesn’t teach them anything about how to stay rich. Brian Cuban offers further insights.
Last week, Justin Wolfers wondered why Belgium seems to have so few celebrities, and he issued you a challenge to name some. But can you name a famously bankrupt Belgian celebrity?
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Belgium has no celebrities because Belgium is boring. In fact Belgium is world famous for being boring, sort of like the Ben Stein of countries.
How do you win, if you don’t go for broke for once?
I have to agree with Mr. Cuban. I do wealthy people’s taxes. These people fall into generally two categories: 1) Those who made money with their minds 2) Those who made money with what I’ll call “talents”.
The second group is your athletes, entertainers, and the like. They tend to make lots of money when they’re younger. The problem with this is, the nature of what they do doesn’t lend itself to long term income. A football or basketball player’s career sunsets in his 30s, often sooner.
The first group tends to earn the big money later, and as such, have some sense of reality to help guide them. They may be very wealthy at 40, but at 25, they were eating Ramen Noodles and suffering through grad school like the rest of us. Also, by earning the big bucks later, they have fewer unemployed years to save for.
Most people who get rich work very hard at a business. To run a business, you have to be financially literate, and you learn that the world is a hard place with many pitfalls and many people who want to part you from your money. You have to be smart and aware of the world around you.
Celebrities have succeeded because they are attractive, or physically talented at a sport, or charismatic in one medium or another. They have generally skimped on education to pursue their celebrity, are financially illiterate, and no brighter than average. People around them insulate them from reality and feed their oversized egos. Celebrities lack the self-awareness to acknowledge their lack of financial expertise, and fall victim to those who are willing to pander to celebrity for financial gain.
The smart ones don’t lose their money; there are just so many stupid ones out there. Easy come, easy go.
Hergé!
There’s probably a selection bias at work. If celebrities had the capability to make and manage money, they wouldn’t have had to resort to becoming a celebrity in the first place. Celebrity professions are typically the crap shoot of the disadvantaged with a payoff system that is little different than playing a lottery (or other gambling). For those few who aren’t just chewed up and spit out by the vast “talent” discovery system the fact of their disadvantage in savvy, experience and education will remain and toss them right back into the hole they tried to climb out of. Those who stand the most to gain from celebrity will only find themselves in a game of “Heads I Win, Tails You Loose”.
The first question I would ask is “Do many celebrities go broke?” That is, do celebrities go broke more frequently than the general population? I would like to see some data. I do think that people who get a lot of money quick may tend to burn through money quick. This is not just athletes and entertainers. What about those who inherit a lot of wealth at a young age? But is it really clear that they are so much more likely to go broke than others.
The second idea I have comparing people who get rich because of a talent they have other than business don’t have the natural insulation that business people getting rich have: the corporation. Think how many businesses fail each year in the United States. It is interesting to note that actors and professional athletes actually have pretty good retirement plans if they work long enough to vest. The respective unions have set up a system that protects the majority of participants with retirement savings and health care.
A lot of the disparaging generalizations we tend to make about athletes and celebrities may not be that true. Take professional football players. On the average they are more educated and have higher standardized test scores than the bulk of the population. There are certainly a few athletes and entertainers who talent and luck are both so good that they become successful and rich without a lot of hard work. But most actors and athletes have to spend a lot of time and do a lot of work to be successful. It takes an incredible amount of dedication and hard work for most people to be successful athletes. It is true that some people are so talented they never have to really stretch themselves. But I know plenty of incredibly smart people who work in business who never really developed much of a work ethic because everything (school, learning a new job, etc.) came so easily they never had to work hard.