Steadfast FinancesBehavioral Economics: Real vs. Perceived Wealth Distribution

Behavioral Economics: Real vs. Perceived Wealth Distribution

Filed in Infographics & Chartology , Investor Psychology 9 comments

One of the odd things about working in finance is that, after a while, you begin to see the hidden quirks of humanity that might be “obscured” to the majority.

Case in point: wealth distribution. Not surprisingly, most people mistakenly believe that even the little guy (e.g. the bottom 20% of earners) gets a small (e.g. at least 1%) seat at the big money table. Not true.

Because of their small percentage share of total wealth, both the “4th 20%” value (0.2%) and the “Bottom 20%” value (0.1%) are not visible in the “Actual” distribution.

After logging enough hours in front of a trading screen, you eventually become self-aware of just how much wealth can be exchanged in a single minute in a semi-popular stock, not to mention, the immensity of the cumulative wealth exchanged in global marketplaces like NYSE and NASDAQ over an entire trading day.

So I’m actually a little disappointed in the >$100k voters in this behavioral economics / investor psychology experiment because they didn’t do a better job at estimating reality versus what the real wealth distribution really is.

But, therein lies the beauty of behavioral economics by illustrating how well our cognitive biases, preconceived notions and cultural ideologies prevent us from seeing reality versus fictitious talking points so common in mainstream media today.

Image Source & Credit
Michael Norton, Consumer Psychologist at Harvard University
Dan Ariely, Behavioral Economist at Duke University
Building a Better America – One Wealth Quintile at a Time (opens to PDF)
Forthcoming in Perspectives on Psychological Science

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Posted by CJ   @   9 October 2010 9 comments
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9 Comments

Comments
Oct 12, 2010
11:32 pm
#1 Evan :

Have a question for you – Does this sort of data inspire or depress you?

Oct 13, 2010
1:53 pm
#2 Matt SF :

Honestly, it probably inspired me a little bit. Had I been asked to estimate how much money is controlled by the top 20% of wealthy individuals, I would have guessed 90% to 95%. Since it’s only in the mid 80s, I find that rather positive.

Full disclosure, though, I’m a glass half empty kinda guy. I find it’s easier this way considering much of the financial world that we live in revolves around the Greater Fool Theory and who can best sell their misinformation/distorted facts in favor of whatever argument/product/service they happen to be selling.

Oct 13, 2010
3:24 pm
#3 ctreit :

I must admit that I am amazed how badly off the bottom 20% is. But I am not so surprised about us having such wrong perceptions. I suppose we are victims of at least two psychological concepts. (1) The egotistical bias makes us think that everybody has the same life, values, outlook, attitudes, etc. as we have. (2) The reference point probably has us start at an equal distribution which is the result of thinking that we live in a meritocracy.

Oct 13, 2010
4:34 pm
#4 Matt SF :

I agree on both counts because this data is a huge slap in the face for anyone who thinks the world is an even playing field.

For example, anyone who takes a gander at Gladwell’s “Outliers” can find out, in layman lingo, just how unfair life can be once you extend the timeline of competition.

But this was a great example of just how severely skewed cognitive bias can become, as well as, how incredibly difficult they are to overcome. Moreover, the less you know the more confident you become in your false assumptions/answers (e.g. good old Dunning Kruger effect).

But charts like these are exactly why I piss off so many people on both sides of the political spectrum: neither side wants to acknowledge their personal biases towards one or the other might need readjusting to real world data versus residing within the confines of their personal fantasy land.

Oct 13, 2010
8:41 pm
#5 ctreit :

I got the same problem. Facts are sometimes uncomfortable especially if they put strong held beliefs into question.

Mar 24, 2011
9:08 am
#6 Matt SF :

In many ways I agree, but the problem is the laws of evolution no longer applies to the human species.

And the people that pander to the people of greater numbers will win the day. It’s extremely cynical of me to say that, but that’s the basic political meme of the last 30 years.

Mar 24, 2011
12:51 pm

That makes a lot of sense. The gap between the rich and poor seems to be increasing even more so and at an exponential rate as we expand in this technological age of innovation.

Mar 24, 2011
1:07 pm
#8 Matt SF :

Agreed. If someone is worried about they’re going to survive paycheck to paycheck, versus someone whose primary concerns is how to invest for tomorrow, chances are far higher the latter will prevail in the money game.

For example, two middle class families in the early 1980s – one invested in the market and one did not. Chances are fairly high one is upper middle class and one is lower middle class now.

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