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 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

Much of the increase in income inequality over the last several decades 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.” Since neighborhoods, schools, workplaces, and other components of social and professional life are increasingly segregated by class, Americans in the middle and lower parts of the income distribution may be unaware of the significant shifts occurring at the very top of the distribution. If the impact of inequality depends in part on the salience of income and wealth disparities, it is possible that those at or near the top of the economic ladder, who are most likely to grasp the nature and extent of these shifts, may be most affected. 

Survey evidence suggests that those at the upper end of the income distribution exhibit different social and economic policy preferences than members of the middle and lower parts of the distribution. Do the preferences of the “merely affluent” (near but below the very top) change as the distance between them and the “truly wealthy” increases? The top of the income distribution primarily consists of members of 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? Do the preferences of these individuals exert a disproportionate influence on policy outcomes?

Political Decision Making

Why has demand for redistribution not increased with inequality? Rational voter theory suggests that as inequality rises, the number of voters who stand to benefit from redistributive policies increases; therefore, political pressure to redistribute from the most affluent to the rest should also increase. Yet survey evidence suggests that support for redistribution in the U.S. has remained flat as inequality has risen. In addition to studying the link between inequality and redistribution, social scientists have scrutinized possible connections between inequality and 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. In fact, behavioral science offers many tools that seem well suited to this inquiry. An examination of inequality’s influence on individuals’ political preferences might help illuminate the mechanisms by which inequality affects democracy more broadly.

Social Cognition

Economic inequality has the potential to influence our perception of each other and ourselves, perhaps especially in group contexts. Are individuals in extremely unequal societies less likely to trust one another or to participate in civic institutions? Do people inflate their self-image 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, existing literature has primarily focused 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 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 rationalize and legitimize prejudice and discrimination by attributing positive traits to stigmatized groups.* We believe that a promising way to advance this line of research 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, people often make assessments of their relative economic position 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 about their position on the socioeconomic ladder? We know very little about the factors that determine whether perceptions of inequality reflect 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) inequality influences individual decision making.

New work on these questions might draw from research that examined how individuals perceive complex community-level phenomena.† Researchers could work to identify the cues that different individuals and socioeconomic groups use to estimate levels of inequality (e.g., the neighborhood frequency of luxury stores or visible home renovations) or investigate the information channels that help shape judgments about inequality (e.g., media reports on earnings gaps). Improved understanding of how individuals assess and perceive inequality in their everyday lives 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).