In recent years, there’s been much debate about how wealth should be redistributed between the richest segment of the population and those with the fewest resources. The debate has intensified in the last two years due to the alarming increase in the concentration of wealth among the richest 1% of the population.
Most recently, researchers from Stanford University, Harvard University, Eötvös Loránd University in Hungary, and the Vienna University of Economics and Business in Austria conducted four studies on the matter. They found that people tend to underestimate the income of the richest 1% of the population.
What researchers found out. They conducted several experiments to determine the rest of the population’s perception of the wealth of the richest 1%. To do this, they asked 990 random U.S. residents to estimate annual household income thresholds for various U.S. income percentiles.
Researchers found that the people they interviewed underestimated the income threshold of the richest 1%. As they moved down the percentile scale, the accuracy of income estimation improved. Participants were fairly accurate in estimating the income of households in the middle and low percentiles. However, their margin of error increased as they moved up the scale, with the estimation of the income of the wealthiest percentile considerably inaccurate.
Investigation continued. The study’s authors were unsatisfied with the results of just one experiment, so they set up several scenarios to test for discrepancies.
The findings from all the studies were consistent: Participants kept underestimating the average income of the top 20% of the population, which represents the wealthiest individuals. However, they didn’t underestimate the income of the poorest 20% of the population. Essentially, they were aware of the income of the lowest-earning households but consistently miscalculated the income of the highest-earning households.
A representation of accuracy in estimating income by percentiles.
If you earn a certain amount of income and up, you’re just “rich.” The findings of the study also suggest that the underestimation of income in the top percentile of the income distribution may be partly caused by a cognitive bias known as scope insensitivity or scope neglect.
This bias affects how people perceive certain amounts. It’s easy to imagine figures like $1,000, $10,000, and $100,000 because we’re all probably familiar with them. However, people see larger amounts like $100 billion as abstract and indeterminate, simply categorized as “rich.” In this regard, a multimillionaire who earns $1 million doesn’t perceive that income in the same way as someone who typically earns $25,000 a year would if they suddenly earned $1 million.
Why the findings are important. The misperception of income inequality is a major obstacle to developing wealth redistribution policies. At the same time, this exacerbates the wealth gap and, in turn, social inequality.
The recent findings show that people tend to underestimate the incomes of the top 1% of the population, which also means they underestimate the actual levels of inequality between the poorest in society and the millionaires.
The rise in inequality is primarily caused by the accumulation of wealth among the top 1%. Underestimating this fact results in insufficient backing for wealth redistribution initiatives. As a result, a billionaire ends up paying the same amount of taxes as a supermarket employee, and a multinational corporation pays the same as a local fruit market.
Image | Vladimir Solomianyi
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