Economic inequality cannot be explained by individual bad choices

A global study published in the journal Scientific Reports finds that economic inequality on a social level cannot be explained by bad choices among the poor nor by good decisions among the rich. Poor decisions were the same across all income groups, including for people who have overcome poverty.

While economic inequality continues to rise within countries, efforts to address it have been largely ineffective, particularly those involving behavioral approaches. It is often implied but, until now, not tested that choice patterns among low-income individuals may be a factor impeding behavioral interventions aimed at improving upward economic mobility.

The new study is based on online surveys in 22 languages with close to 5000 participants from 27 countries in Asia, Europe, North America, and South America. Decision-making ability was measured through 10 individual biases, including (1) temporal discounting, not preferring immediate funds over larger future gains; (2) overestimation, or thinking you are better than you are at making decisions; (3) over-placement, or thinking you are better than the average person at making decisions; and (4) extremeness, or taking the “middle option” simply because it seems safer than the highest or lowest.

Taken along with related work showing that temporal discounting is tied more to the broader societal economic environment rather than individual financial circumstances, the findings are a major validation of arguments stating that poorer individuals are not uniquely prone to cognitive biases that alone explain protracted poverty.

What the researchers say: “Our research does not reject the notion that individual behavior and decision-making may directly relate to upward economic mobility. Instead, we narrowly conclude that biased decision-making does not alone explain a significant proportion of population-level economic inequality,” said the lead author. “Low-income individuals are not uniquely prone to cognitive biases linked to bad financial decisions. Instead, scarcity is more likely a greater driver of these decisions.”

So, what? This is a great study which confirms some important points about social and individual decision making. It ties in with earlier studies which have shown that differences in wealth, position and power are largely due to luck and have little to do with the relative decision-making ability of the rich, powerful or highly placed.