Inequality and Decision Making Conference: Promising Research Directions

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Financial Decision Making

Does an individual’s position in the income distribution affect her choices about borrowing or investment? Does the level of inequality in a person’s community alter his financial priorities? Does willingness to take financial risks change as inequality rises or falls?

Financial decision making encompasses a broad array of behaviors and cognitive processes, including many that stem from attitudes toward risk. Several studies have already demonstrated that one’s position in a distribution can influence financial risk taking: subjects in one study were more likely to purchase lottery tickets when made to believe that their incomes were relatively low. Similarly, individuals placed into the bottom two positions of a distribution in a laboratory setting exhibited “last place aversion” and were significantly more likely than others to enter a risky lottery. If position in the distribution can affect financial decisions, might changes in the shape of the distribution likewise have an impact?

Shah, Mullainathan, and Shafir found that the poor may be more likely to over-borrow, even when faced with high interest rates, in part because scarcity leads individuals to attend to immediate needs, neglecting less urgent but perhaps more important problems. Could certain types of inequality likewise impact how individuals allocate attention, in turn exerting similar or related effects on financial decision making?

Behavior and Decision Making at the Top

As income inequality has increased over the last several decades, much of the movement has occurred in the upper reaches of the distribution. Top earners have seen significant real income growth and received the lion’s share of the gains. Similarly, “almost all” of the considerable increase in wealth inequality over the last three decades can be attributed to “the rise of the share of wealth owned by the 0.1% richest families.” Americans in the middle and lower portions of the distribution may however be in the dark about many of these economic shifts, since they often inhabit different social circles and live in neighborhoods separated from economic elites. If the impact of inequality depends in part on the salience of income and wealth disparities, it’s possible that those at or near the top of the economic ladder may be most affected.

Survey evidence suggests that those at the upper end of the income distribution exhibit distinctive social and economic policy preferences. Do such preferences among the “merely affluent” (i.e., near the top) change as the distance between them and the “truly wealthy” increases? The top of the income distribution is primarily occupied by an identifiable set of professional groups: corporate executives, lawyers, entrepreneurs, and financial, medical, entertainment, and real estate professionals. Does rising high-end inequality particularly influence policy preferences or value orientation among these high-earning professionals?

Political Decision Making

As inequality has increased in recent decades, why has there not been a consequent increase in support for redistribution? Rational voter theory suggests that as inequality rises—and the number of voters who stand to benefit from redistributive policies increases—the political pressure to redistribute from the most affluent to the rest should increase. And yet, survey evidence suggests that support for redistribution in the U.S. has remained flat as inequality has grown. In addition to studying the link between inequality and redistribution, social scientists have scrutinized possible connections with other high-level political variables, such as average voter turnout and total campaign contributions. However, relatively little attention has been paid to studying how changes in inequality might affect political decision making at an individual level, which in turn could shape large-scale political outcomes. This is surprising because behavioral science offers many tools that would seem well suited to such an inquiry. Examining whether individuals’ political preferences shift in the face of a changing income distribution could be an especially fruitful path to pursue.

Social Cognition

It seems possible that economic inequality influences the attitudes we hold toward one another, as well as the ways we think of ourselves in group contexts. Are individuals in extremely unequal societies less likely to trust one another or participate in civic institutions? Do people view themselves in an increasingly positive light in order to cope with the competition for status that accompanies high levels of inequality? Are levels of civic participation or social cohesion linked to the degree of inequality in a society?

Although numerous studies provide evidence of the effects of inequality on social cognition, this line of research has primarily relied on cross-national correlations. One research team found, for example, that a society’s level of income inequality is highly correlated with the extent to which its residents tend to see themselves as better than the average person. Cross-country studies have also indicated that high inequality at the national level correlates with lower degrees of trust and greater prevalence of ambivalent stereotypes, which are thought to legitimize prejudice and discrimination through the association of positive traits with stigmatized groups.* The next step, it seems, is to examine whether causal relationships between economic inequality and basic social cognitive processes —such as self-enhancement and interpersonal perception—can be identified at the individual level, potentially in a lab setting.

*The stereotype content model argues that ambivalent stereotypes “paint both advantaged and disadvantaged groups as possessing distinctive but counterbalanced strengths and weaknesses,” which encourages the perception that “every class gets its share,” and serves to legitimize discrimination and rationalize the status quo (Durante et al. 2013). See also, Kawachi et al. (1997).

Perceptions of Inequality

Because exact measures of others’ income and wealth are rarely available to us, assessments of relative position are often made on the basis of very imperfect signals. Americans, irrespective of ideology or income level, vastly underestimate the degree of inequality in the national distributions of income and wealth. If people fail to perceive inequality accurately, what makes inequality salient and forms the basis of their perceptions? We know very little about when, where, and why perceptions tend to mirror or depart from reality; whether these dynamics differ across political, socioeconomic, geographic, or age groups; and how these patterns might inform our understanding of how (and in what contexts) individual decision making may be influenced by inequality.

New research might draw on the lessons of inquiries that decomposed complex community-level phenomena to better understand how they are perceived.† Researchers could aim to identify cues that different people— and different socioeconomic groups—use for estimating inequality (e.g., the neighborhood frequency of luxury stores or visible home renovations) or test the information channels that may affect judgments about inequality (e.g., media reports on earnings gaps). Improved understanding of how inequality is perceived and assessed in everyday life could open new avenues in the study of inequality and decision making.

†For example, to better understand how social disorder is perceived in communities, scholars identified and examined the physical and social cues that signal social disorder (e.g., vandalism, litter, and public consumption of alcohol). See Hunter (1978); Perkins and Taylor (1996); Sampson and Raudenbush (2004).