Tuesday, March 19, 2013

How Should Wealth be Distributed? (Part One)

US Wealth Distribution 

Recent research by Harvard's Michael Norton and Duke's Dan Ariely (described here) reported on a survey of respondents' views on how wealth should ideally be distributed (column 1), their perception of how wealth is distributed (column 2), and how wealth really is distributed (column 3).

There's stunning divergence between these charts.  People feel wealth should be fairly equally distributed.  They perceive that wealth is not distributed that equally, but that it's in the ball park.  However, they miss the fact that wealth is distributed much much more unequally than they perceive.

Wealth is extremely unevenly distributed in the US.  The top 1% hold 40% of the wealth, and the top 20% hold over 80% of the wealth.  Yet a random sample of 5,000 Americans perceive that the top 20% hold just over 50% of the wealth, and they feel that, ideally, they should hold about 30% of the wealth.

The research has provoked discussion on the topic, and has also spawned a video that expresses the data more visually which will appeal to those less comfortable with simple percentages and statistics.

The reason for this misperception among Americans might be explained by some of Dan Ariely's previous work in behavioural economics.  Dan Ariely is best known for his book Predictably Irrational.  It's a great read and I highly recommend it.  (I've written about Ariely's work before in posts here, here, and here.)  Ariely's research highlights the many behaviours exhibited by humans that are simply not rational.

One of Ariely's key points is that people assess choices in comparison to easily comparable choices in their own environment.  So one could postulate that people have a distorted perception of wealth distribution because they mostly pay attention to the people around them, people likely to enjoy similar levels of wealth to their own.  Then they extrapolate from that experience and assume the whole country exhibits a similarly flat wealth distribution.  They are also misled by evaluating people's wealth based on their apparent material possessions, yet one family might own their McMansion outright while the family next door is drowning in debt.

The survey did not uncover a big difference in attitude between those who voted Republican and those who voted Democratic.  They had a remarkably similar view on how wealth should be distributed.  American politics can be very puzzling to non-Americans.  If people voted purely based on their economic self-interest, then the top 1% - or let's be generous and say the top 20% - would vote Republican and the rest would vote Democratic.  However, we don't see those voting patterns.  Puzzling.

* For those interested in this topic, there's a second post on this topic here.

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