New research shows economic inequality spurs people to take greater risks.
By Tom Jacobs
(Photo: John Lamparski/Getty Images)
Economic inequality has been blamed for many societal ills, from rising crime rates to lower levels of economic growth. Adam Smith warned that it skews people’s sympathies, leading them to admire the extremely rich to an unhealthy degree.
Newly published research suggests the seminal economist was on the right track. It reports that, in unequal societies, average citizens compare themselves to the wealthy, and find their lives lacking. This prompts them to take greater risks — which often leads to larger losses.
“More unequal outcomes lead people to perceive that they need more resources to be satisfied,” writes a research team led by psychologist B. Keith Payne of the University of North Carolina–Chapel Hill. “Higher perceived needs, in turn, motivate greater risk-taking to meet those needs.”
Writing in the Proceedings of the National Academy of Sciences, the researchers demonstrate this dynamic in a series of experiments. The first featured 221 people recruited online to play a gambling game.
“Inequality was manipulated by showing participants a distribution of previous players’ earnings,” the researchers explain. Half of the participants were told the top third of earners “earned only modestly more money than the bottom third,” while the others were told the difference between the two was relatively large.
All were then asked “What is the minimum about of money you would need to win to feel satisfied with your performance?” Finally, they were given the opportunity to place three bets, which could earn them actual money. These ranged from low risk/low reward (a 90 percent chance to win 28 cents) to high risk/high reward (a 5 percent chance to win $5).
Those who were told previous winners took home far more than losers “expressed higher perceived need,” the researchers report. They also make riskier bets, “with a higher probability of losing.”
To determine if this dynamic (which was also found in a second experiment) drives real-world behavior, Payne and his colleagues examined online search terms indicating an interest in monetary risk-taking. They noted the number of Google searches in each state since 2004 for terms such as “lottery,” “win money,” or “no down payment.” These were compared to state-level measures of economic inequality.
They found searches for high-risk/high-reward money-making strategies were significantly higher in states with greater income inequality. This effect was “driven by inequality at the upper end of the income distribution,” suggesting that people were influenced by the conspicuous consumption of the very wealthy.
“Rising inequality may change what individuals consider to be enough,” the researchers conclude, “and therefore the risk they are willing to take to gain more.” Sounds like a textbook example of a vicious circle.
Perhaps it’s time to heed the wisdom of the Tao Te Ching, which urges its readers “to be simply yourself, and don’t compare or compete.”