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Psychology
The Psychology Behind Inequality
Why don't people care about economic inequality?
Posted March 10, 2020 Reviewed by Abigail Fagan
By Joseph Heffner and Oriel FeldmanHall
Economic inequality is at an all-time high in the United States. Some claim that decades of systematic legislation have resulted in the wealthiest three families owning more wealth than the bottom half of the country.
This trend is not reflected in other countries with developed economies: Out of all 36 countries with comparable economics, the US ranks last in equal income distribution. As a result, we have returned to Great Depression levels of income inequality, and for the first time in American history, the working class pay a higher effective tax rate than billionaires.
The adverse effects of economic inequality are well documented. Across societies, higher rates of inequality are associated with a myriad of health and social problems including obesity, mental illness, decreased life expectancy, and higher crime rates. The World Economic Forum ranked income inequality as one of the most important trends driving global risks such as social instability and unemployment. And yet a recent poll shows that less than half of Americans view income inequality as a serious problem. Why don’t people care?
Political scientists, economists, and philosophers have wrestled with this paradox for decades. The answer to this question—at least in part—can be explained by understanding how people experience inequality in their daily lives. Here, we offer one slice of the explanation: the psychology behind inequality perpetuates an unequal system.
People disproportionally care about local inequality
In an age where we are spending more and more time online, it is easy to compare ourselves to others. Yet not all comparisons are created equal (pun intended).
I may care less about a celebrity buying a multimillion-dollar house than my neighbors posting pictures about their luxurious vacation in the Bahamas. This is because social comparisons are particularly salient when made to others in your community. In comparisons with similar people, inequality can drastically shift our behaviors.
In one particularly creative study, researchers examined how a neighbor winning the lottery shaped others’ financial behavior. They pulled data from the Dutch Postcode Lottery, a system that randomly selects a postal code and distributes new BMWs to all lottery participants in that area.
This creates a unique situation where nonparticipants (who did not buy a lottery ticket) are faced with upwards social comparisons to neighbors who just won a new BMW. The feeling of “keeping up with the Joneses” can be potent: Nonparticipants who lived next to winners were far more likely to buy a new car in the six months after the lottery, compared to those who lived in non-winning districts.
Visible inequality perpetuates adverse effects
Recent work also reveals that concealing inequality (e.g., not knowing how much your colleagues make) allows cooperation to blossom. And yet we live in a world rife with obvious and blatant inequalities.
To explore how visible inequality changes people’s behavior, researchers at Yale University created mini-societies of individuals with varying degrees of economic inequality and wealth visibility. When rich participants knew their neighbors were poor, they became less likely to cooperate with them. Wealthy individuals chose to selectively play with rich partners, resulting in a “rich get richer” and “poor get poorer” scenario. In contrast, when wealth was invisible (and thus inequality was unknown), cooperation flourished.
These experiments reveal a contradiction of sorts. Instead of rebalancing the scales, wealthier individuals use the knowledge that others have less than themselves to perpetuate inequality—perhaps in part because those who are poor are believed to be less deserving.
Inequality increases risky behavior
Although social comparisons with others in your community are particularly influential in shaping how we act as consumers (e.g., buying fancy cars), these comparisons can also drive detrimental, risky behaviors.
Researchers at the University of North Carolina at Chapel Hill wondered how constantly comparing oneself to top earners influenced people’s decision-making abilities. In one experiment, they asked their subjects to gamble, but each gamble differed in value and risk (e.g., 90% chance to win 28 cents or 5% chance to win $5).
The researchers split participants into two groups. One group was told that past participants earned an average of 51 cents and the spread of earnings was relatively equal, while the other group was told that past participants earned on average 51 cents, but the spread of earnings was highly unequal.
When the distribution of earnings for past participants was very unequal, current participants took greater risks, presumably to try to achieve higher monetary outcomes. This relationship between inequality and risk taking is mirrored in the real world as well. People who live in states with greater income inequality exhibit greater risky behavior (e.g., greater participation in lottery gambles and payday loans).
Rising inequality causes people to take risker endeavors as they attempt to reach the top, but this may ultimately contribute to maintaining an unequal system. By examining the psychological impact of inequality, we can begin to understand the deeper mechanisms that contribute to the perpetuation of economic inequality. The question becomes, then, will we manage to do anything about it?
