Dan Ariely of Duke Business School is quite ingenious when it comes to devising experiments to determine how people think and what drives their decision making when it comes to economic matters. In his entertaining book Predictably Irrational, he challenged the traditional notion of economists that people are rational actors on the economic stage, making decisions in their own best interest. Instead he argues that people are irrational (i.e., not really thinking things through to get the best result for themselves) but irrational in a predictable way.
Now in a new paper co-authored with Michael Norton of Harvard Business School titled Building a Better America – One Wealth Quintile at a Time, they demonstrate that people in the US have a wildly inaccurate understanding of how wealth is distributed in the US. (I have already discussed studies (see here and here) showing the rapidly rising inequality in incomes in the US.)
In 2005, they asked a representative sample of 5,522 people from 47 states with median income, age, gender, and voting patterns that were matched to the population to identify which of three wealth distribution models they would prefer their societies to have. All the respondents were given this definition of wealth: “Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person’s net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages.”
What they did was show people three pie charts representing different distributions of wealth by quintiles and ask them which society they would like to join, given that they would be assigned to a quintile in that society according to the ‘veil of ignorance’ model used by John Rawls to determine how to construct a just society. In this case, the ‘veil of ignorance’ took the form of telling the respondents, “In considering this question, imagine that if you joined this nation, you would be randomly assigned to a place in the distribution, so you could end up anywhere in this distribution, from the very richest to the very poorest.”
The three pie charts (as presented to the respondents) were unlabeled. The top right one was constructed using perfectly equal distributions. The top left one was constructed using the actual income distribution in Sweden. The bottom chart was obtained using the actual wealth distribution in the US (with the top quintile having 84% of the wealth, the second 11%, the third 4%, the fourth 0.2% and the bottom 0.1%).
The respondents overwhelmingly (92% vs. 8%) preferred the Swedish distribution to the US and by a considerable margin (77% vs. 23%) for the equal distribution over the US. There was also a slight preference for the Swedish distribution over the perfectly equal one. Who knew that Americans had such an egalitarian mindset?
For the second part of their study, the researchers asked respondents to estimate what they thought the actual wealth distribution in the US is and also what they thought it should be. The results are shown in this chart that again splits the distribution by quintiles. The actual distribution is given the top line and is the same as the pie chart above for the US. The second line is the response when asked what they think the current distribution is. The third line represents what they would like it to be. The results are interesting.
As the study authors say,
First, respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth. These desires for more equal distributions of wealth took the form of moving money from the top quintile to the bottom three quintiles, while leaving the second quintile unchanged, evidencing a greater concern for the less fortunate than the more fortunate.
In other words, not only do people think that wealth is more equitably distributed in the US than it actually is, their ideal of what the distribution should be would require a considerable redistribution of wealth from the richer to the poorer. Americans are socialists at heart, though they may not realize it.
What was also interesting is that there were not marked differences by age or gender or political party affiliation or income and wealth. As the authors say, “we observed a surprising level of consensus: All demographic groups – even those not usually associated with wealth redistribution such as Republicans and the wealthy – desired a more equal distribution of wealth than the status quo.”
What has happened in the US is that the ruling wealthy oligarchy that controls the government and the media keeps repeating the message that the current distribution of wealth is not only good but that there should be even more inequality by giving tax breaks and other benefits to the rich. Given the almost total disconnect between reality and what people think is the reality, it should not be surprising that it is almost impossible to have a reasonable discussion in the US about income and wealth and taxes.