An unbiased look at our economic successes and failures shows that luck plays a significant role. Consider identical twins. For four summers in a row, my colleague Orley Ashenfelter and I conducted a survey of twins at the world’s largest twins festival, in Twinsburg, Ohio.21 We interviewed identical twins about their education, how long they dressed alike, and their incomes. Our goal was to find twins with differences in educational attainment and determine whether the twin with more education earned a higher income than the other twin. Most twins have the same education, but we did survey some with different schooling levels. On average, we found that a twin who completed four more years of education than his or her sibling earned about 60 percent higher wages.
But luck also matters in terms of economic success. Identical twins with the same level of education who were raised by the same family, under the same roof, and typically dressed alike and went to the same school, often have very different economic outcomes as adults. Earnings differed by 50 percent or more in a quarter of the identical twins with identical schooling levels, and by 25 percent or more in half of the sample. These large disparities for two genetically identical individuals with such similar backgrounds suggest that luck is an important factor in the overall labor market, as it is in the music industry. Sometimes one twin was lucky to land a high-paying job, while his sibling was scrambling because the plant where he worked closed. One twin may have had a supportive, agreeable boss and the other a difficult boss. In other cases, one of the twins had a spouse who kept him on a straight and narrow path, while the other was not so fortunate. For many reasons, identical twins were not treated identically by the economy, and chance factors accounted for much of the differences in their outcomes.
As in music, timing matters as well. A worker can be lucky and enter the job market when it is strong, or unlucky and enter the job market in the middle of a recession. Research has shown that the labor market consequences of graduating from college in a year when the economy is weak are large, negative, and persistent.22 Another study of MBA students found that graduating from business school in a weak year for stocks reduces the chances of getting a high-paying Wall Street job, while graduating in a bull market boosts the chances of landing a high-paying career in investment banking.23 The study concluded that “investment bankers are largely ‘made’ by circumstance rather than ‘born’ to work on Wall Street.”
And, as in the music industry, the effect of luck is amplified in a winner-take-all market in the general economy. Consider CEOs. The pay of top executives relative to their workers has soared since the 1980s. In 1978 the average CEO earned about 18 times as much as the average worker; today the average CEO earns more than 250 times as much.24 As in Alfred Marshall’s time, successful executives can now undertake initiatives and new ventures on a much vaster scale, which has undoubtedly played a role in their outsized compensation.
But luck and an erosion of norms of fairness have also boosted CEO pay in many cases. In a landmark study, Marianne Bertrand and Sendhil Mullainathan show that the compensation paid to CEOs of oil companies jumps when the price of oil rises.25 Since the price of oil is set on the world market, with gyrations caused by geopolitical forces well beyond the control of oil company CEOs, movements in the price of oil have nothing to do with their job performance. Yet they benefit when the price of oil rises. Some of the profit windfall from oil price spikes is also shared with workers further down the wage scale, but not with those at the bottom, according to my latest research.26
Cliff Burnstein: Even Managers Get Lucky Sometimes
Superstar managers as well as superstar musicians benefit from luck. Over Chinese food, Cliff Burnstein told me that luck played a critical role in his music career on four occasions.27
First, he was lucky to get his start in the music business. While he was finishing up studying demography in graduate school at the University of Pennsylvania in 1973, Burnstein mailed letters seeking a job to several music companies. The only one that invited him for an interview was Mercury Records in Chicago. Why? According to Burnstein, it was pure luck. Mercury’s president, Irwin Steinberg, was from his hometown, Highland Park, Illinois, and one of Steinberg’s sons was a student at the University of Pennsylvania. As a result of these coincidences, the personnel department probably thought that Burnstein would be an interesting candidate to interview. With his foot in the door, Burnstein was offered and accepted a job in the finance department at Mercury, and soon moved to promotion and A&R.
After a year at Mercury Records, he caught another break. Early one Monday morning, he was given the assignment to listen to an album by an unsigned—and then unknown—Canadian hard rock band called Rush. Mercury needed to decide by the end of the day whether to sign the band. Why was Burnstein asked to make a recommendation about Rush? He was the only one in the office that day. To his surprise, Burnstein thought the music was excellent. He did some homework, called someone at radio station WMMS in Cleveland, who confirmed the record was hot, and convinced Steinberg to sign the band. Rush subsequently garnered seven Grammy nominations and was inducted into the Rock and Roll Hall of Fame in 2013. The band’s success increased Burnstein’s credibility and self-confidence.
In 1980, Burnstein left Mercury Records for Leber-Krebs in New York City, where he worked with his close friend Peter Mensch. Burnstein and Mensch decided to strike out on their own and form Q Prime Management in 1982. At the time the duo was ready to leave Leber-Krebs, they were managing AC/DC, the Scorpions, Michael Schenker (younger brother of Rudolph Schenker, the Scorpions’ guitarist and songwriter), and Def Leppard. They could not take AC/DC with them, and the Scorpions and Schenker preferred to stay with a big, established firm. Burnstein and Mensch were able to take Def Leppard because, as luck would have it, David Krebs thought the band was destined for failure. The only time Krebs saw Def Leppard perform, Cliff Burnstein told me, the band was the opening act in an outdoor show held outside Atlanta on a brutally hot day. A guitar player, who Burnstein estimates weighed only 105 pounds, passed out from the heat and excess alcohol consumption. A stagehand dragged him offstage by the scruff of his neck, and the show wobbled on. Needless to say, Krebs was unimpressed. But the young lads from South Yorkshire were more than happy to join Cliff and Peter at Q Prime when they split from Leber-Krebs. Cliff and Peter managed Def Leppard, their first Q Prime client, for a quarter of a century, and the band sold more than 100 million albums. Who knows what would have happened if the temperature had been cooler during that Atlanta show.
Q Prime immediately recognized that they needed more than one act. Cliff’s view has long been, “Don’t manage one act, because then they manage you. Then you’re just doing their bidding. You have to diversify.” The fourth time luck struck in Cliff Burnstein’s storybook career was surely a grand slam. On the lookout for another band to manage in 1984, Burnstein and Mensch were in London and visited a record store. They happened to notice a couple of shoppers wearing homemade Metallica T-shirts. Only vaguely familiar with Metallica at the time, Burnstein and Mensch surmised that any band that generated such engaged fans must be special. They have managed Metallica since 1984, and the band has consistently been among the top acts in the music business.
In all of these examples, luck was necessary but not sufficient to launch and advance Burnstein’s career. Someone with less persistence, less talent, and less perceptive judgment could not have taken advantage of these opportunities. Cliff Burnstein and his longtime friend and business partner Peter Mensch are routinely included on the Billboard list of the most powerful people in the music industry because of their business acumen, and because they treat their artists fairly and with respect. But some lucky opportunities that arose along the way opened the door for them to apply their skills. To use a baseball analogy, skill is required for a baseball player to hit a grand slam, but luck is also necessary to place three of the previous batters on the bases at the time of his at-b
at.
Harmonizing Good and Bad Luck in Your Portfolio
The unpredictability of financial assets such as stocks is well known. Although the stock market does not exactly follow a random path, movements in prices may seem random. “A blindfolded monkey throwing darts at a newspaper’s financial pages,” Burton Malkiel wrote in his 1973 bestseller A Random Walk Down Wall Street, “could select a portfolio that would do just as well as one carefully selected by experts.”28 Experience has borne out this prediction. In 2016, for example, two-thirds of actively managed large-capitalization stock funds underperformed the S&P 500 large-cap index.29 And even when an actively managed fund does beat the overall market index in one year, the odds of it doing so again the next year are not very good. What’s more, actively managed funds tend to charge higher fees for the privilege of earning unimpressive returns. Unless you’re as savvy an investor as Warren Buffett, the best advice economists can give is to invest your savings in a well-diversified, low-cost passive index fund.
Although we cannot control luck, we can seek a balance between risk and reward. If, for example, you have a job that is tied to the ups and downs of Wall Street, it would behoove you to consider investing in safe assets, such as CDs (certificates of deposit, not compact discs) or Treasury bonds, to reduce your risk. Financial economists have long emphasized that we can minimize the effect of bad luck by deliberately diversifying our portfolios.
An alternative approach is to “invest in what you know.” This philosophy is often associated with legendary mutual fund manager Peter Lynch. Lynch’s advice has been summarized as follows: “Use your specialized knowledge to home in on stocks you can analyze, study them and then decide if they’re worth owning. The best way to invest is to look at companies competing in the field where you work.”30
In a 1984 interview in Playboy, Paul McCartney described his investment philosophy in similar terms:
The music publishing I own is fabulous. Beautiful. I owe it all to [my wife] Linda’s dad Lee Eastman and her brother John. Linda’s dad is a great business brain. He said originally, “If you are going to invest, do it in something you know. If you invest in building computers or something, you can lose a fortune. Wouldn’t you rather be in music? Stay in music.” I said, “Yeah, I’d much rather do that.” So he asked me what kind of music I liked. And the first name I said was Buddy Holly. Lee got on to the man who owned Buddy Holly’s stuff and bought that for me. So I was into publishing now.31
This worked out splendidly for Paul McCartney. The “buy what you know” philosophy has been employed by many others, including Michael Jackson (who once outbid McCartney to purchase the rights to the Beatles’ catalog) and Quincy Jones.
Although there can be some benefits from investing in what you know, it can also be quite risky. Enron employees knew Enron very well, for example, and a great many of them invested their retirement savings in Enron. This didn’t work out well when Enron failed in 2001. They lost their jobs and their life savings along with it.
As investors, we tend to be overconfident, which means that we may know less than we think we know. Studies find that retail investors (especially men) tend to sell stocks that go on to outperform the market and tend to buy stocks that subsequently underperform the market.32 We also tend to trade too often. Buying and holding a diversified portfolio is a better strategy for most investors. Evidently we know less than we think we do when we’re buying and selling stocks.
In any event, there is some common ground between a diversified portfolio and buying what we know. We can invest in what we know to diversify our portfolio and find a good balance between risk and reward. Gloria Estefan, for example, told me that she knew from the beginning of her career that women singers “have a much shorter shelf life in this industry,” and that fans’ tastes can be fickle. “You should not put all of your eggs in one basket, especially something that is as volatile as music.” She and her husband, Emilio, consciously invested in hotels, real estate, and restaurants to diversify their sources of income outside of music.33 They invested in Cuban and Lebanese restaurants because they knew the food from their heritage.
This is a simple but profound idea. Portfolio theory—the strategy of assembling a mix of investments to maximize return for a given level of risk—has been around for a long time. But I have been struck by the resistance to this idea in the music business. Musical tastes are subject to fads and large swings. Success in music is difficult to predict and unlikely to last. Record labels, promoters, and managers hold risky portfolios if their client rosters consists of a small number of bands. And even if that list has a large number of bands, the portfolio is risky if they are in the same genre or subject to the same market swings. Why not look for ways to diversify their risk? Yet this doesn’t seem to be the nature of the business. Instead, most companies in the music business seem heavily invested in one artist, one genre, or a single risky asset in one way or another, with little effort devoted to diversification.
One exception is Q Prime, which manages a mix of heavy metal, rock, and country bands. I asked co-founder Cliff Burnstein if the eclectic mix of artists—from Metallica to Eric Church and Gillian Welch—was a deliberate strategy to diversify risk. If preferences for heavy metal, for example, were to wane, interest in country music might well rise, keeping a constant demand for his clients. I was expecting to hear a portfolio theory of music. Instead, Cliff gave a simpler answer: he just liked country music because that was what he heard on the radio when he was growing up. It is hard to argue with success, no matter how you get there.
Invictus
My high school English teacher assigned the poem “Invictus” by William Ernest Henley because, she said, at our tender age we would be able to relate to the poem better than we would when we were older. At the time, I had no idea what she meant. But I still haven’t forgotten the lines: “I am the master of my fate:/I am the captain of my soul.” As time goes by, it becomes increasingly clear that we are not quite the invincible captains of our ships that we once thought we were. Both good luck and bad luck intervene.
Sometimes it takes an incredible shock of bad luck to realize that “Invictus” is the stuff of fairy tales. The New York Times columnist Frank Bruni recently wrote about this epiphany after waking up one morning with severe, probably irreversible damage to the vision in his right eye:
I went to bed believing that I was more or less in control—that the unfinished business, unrealized dreams and other disappointments in my life were essentially failures of industry and imagination, and could probably be redeemed with a fierce enough effort. I woke up to the realization of how ludicrous that was.34
Bruni’s eventual solution was to focus on what he could still accomplish, and to recognize how lucky he was despite his impairment. “Show me someone with a seemingly unbroken stride and unfettered path,” he wrote. “More often than not, he or she is hampered and haunted in ways that you can’t imagine.”
One person who was not haunted despite his run of bad luck in the music business and his own vision problems (due to glaucoma) is Sixto Rodriguez. The movie Searching for Sugar Man revealed a man who seemed perfectly at peace with his life after his music career fizzled in the 1970s. The filmmaker Malik Bendjelloul, who later committed suicide, said that Rodriguez gave most of his money away, despite his impoverishment.35 After the movie was released, Rodriguez’s music career had a second wind, this time a strong tailwind. At age seventy-six, he is touring internationally and enjoying fame and a measure of fortune, all the while maintaining the same Zen-like presence that he possessed during his years of obscurity. When asked about switching from construction back to his musical career, Rodriguez told a reporter, “Well, you never throw away your work clothes. But this thing is like a monsoon.”36
CHAPTER 6
The Show Must Go On: The Economics of Live Music
I am a salesman. I come from a lo
ng line of traveling salespeople on my mother’s side. And I think I’m a good salesman of ideas, songs, melodies, if I believe in them.
—Bono
“I’m very sorry,” Bono kept saying. “Something went wrong that night, the energy wasn’t right.” Bono, whose given name is Paul David Hewson, was profusely apologizing to me about a concert he had performed in Madison Square Garden almost a decade earlier. I’d attended the show in New York that night, November 22, 2005, with a team of grad students to survey the audience about how they bought their tickets, how much they paid, and why they went to the show. The Irish rock band U2 has sold more tickets and made more money touring than anyone since the early 1980s. U2’s Vertigo tour grossed well over $350 million from 131 shows held from 2004 to 2006, and was the subject of three documentary films.1 Their 2009–11 U2 360° tour grossed a record $736 million from 110 shows. What better laboratory to study the economics of live entertainment, the main source of income for most musicians, than a U2 concert in Madison Square Garden?
So when I bumped into U2’s frontman, Bono, outside the West Wing of the White House almost ten years after that night, I finally had a chance to share my research findings with him. He listened intently as I explained that almost a third of the tickets for the show had been resold on the secondary market for about twice their list price, and they were disproportionately good seats. But mostly he wanted to apologize for the show not living up to his expectations. Of all the shows he has performed, I was amazed he could recall this one so clearly. Here was a true professional. Weeks later, he told a mutual friend that he was still sorry that that show had not gone as well as he had hoped.
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