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This works because most managers and founders aren't smart enough to pay above market.

Exactly. This is one of those things that makes sense, and just because its impossible for everyone to do it, it does not mean you shouldn't.

It's like hiring the best developers possible - obviously not everyone can hire the best devs, but it doesn't mean you shouldn't try to do it anyway.

And that brings us back to the critical point: Of the people who are smart and have 12+ years experience, a significant portion will (A) be wise as to the going rate for good people, and (B) have families so that a below market salary has a clear negative impact on their daily lives.

Is it really worthwhile to choose to avoid hiring ~50% of the best people in the industry at the outset, on a vague fear that personal happiness will doom the startup? Is that a winning recruitment strategy?

If the distribution has a very high skewness this is indeed possible :)

Keep quiet, that is our brilliant plan!