Entrenching inequality

Does inequality feed on itself? Some recent experiments by Jeffrey Butler suggests the answer is: yes.

He got subjects to play an urn-guessing game. They were presented with two urns, one with with mostly red balls and another with mostly white, and were asked to guess which of two urns the experimenter was using, based upon seeing one ball drawn. Subjects were split randomly into two groups, one being better paid than the other.

Both the low-paid and high-paid groups got roughly the same amount of guesses right.However, when they were asked: are you a better or worse than average guesser? things changed. Whereas 85% of the high-paid group said they were better than average, only 60% of the low-paid group did. Butler says:

Inequality undermines the confidence of the disadvantaged and boosts the confidence of the advantaged.

This confidence is not just idle talk. In other experiments, Butler found that more confident subjects were more likely to choose to enter winner-take-all tournaments, thus increasing their chances of big payoffs later.

This implies that initially arbitrary inequality can become persistent, because it reduces the desire of the worst-off to compete.(This is, of course, only one of several routes in which this can happen).

It's easy to see that this might have real-world applications.It's consistent with Afro-Caribbean boys doing poorly at school; with working class kids being loath to apply to Oxbridge; and with women not applying for top jobs. It's also consistent with some of the unemployed not wanting to work: why apply for jobs if you'll only be knocked back?

This implies that a popular explanation for inequality might be no explanation at all. It's sometimes claimed that the successful are successful because they worked hard and the unemployed are unemployed because they are lazy. But this research suggests the causality might be reversed. Maybe successful people work hard because prior good luck has led them to think that work pays, whilst others are lazy because bad luck has reduced their confidence. In other words, it could be that the preferences which rightists believe to be the cause of inequality are in fact the effect of it.

We know from research in personal finance that preferences for risk are partly endogenous; people who have experienced recession (pdf) or the death of a child are more risk averse than others. Wouldn't it be remarkable if risk appetite was the only endogenous preference? If ambition and appetite for work are also endogenous, then a moralistic defence of inequality becomes less tenable.

Comments

[Stuart]

Interesting, but I have a question. Were the high and low paid groups were told how much the difference was, and why there was a difference?

[Luke]

Sorry, I have a question too. The confident are more likely to enter "winner takes all" games. OK. But assuming such games in real life have a cost (in paying cash or taking a riskier job/career path), doesn't that mean that (say) half the confident will get rich, but the other half will end up poorer?

Not that this detracts from the rest.

[Staberinde]

Interesting. I think we see something similar in university entrance, where the 'pathfinding' first-in-family to attend university tends to study a more traditional subject at a less prestigious institution than the siblings and children who follow them.

As someone who entered an industry where neither I nor my parents had a network, and as the child of working class parents, my approach to my career has been far more risk-averse than that of my colleagues, most of whom are middle-class children of middle-class parents. They take more risks with their careers than me because, I suspect, they feel more confident in their entitlement to be there. A misstep for them is to go back a rung - for me it's a drop all the way down the ladder!

Of course, in a true meritocracy everyone might feel that way. But this is precisely why human beings try to accumulate wealth, status and influence - to inoculate themselves and their families from the risk of backsliding.

And therein lies the fundamental problem: do we really want to prevent people giving their children every advantage possible? Can we realistically stop people with resources from doing so? Do we want a society where, irrespective of how hard your parents worked, how brilliant their ideas, how frugal they were and how lucky they were, every child starts from scratch?

Isn't this to deny human nature? Yet isn't an acceptance of privilege the antithesis of meritocracy and the biggest barrier to equality?

[chris]

@Stuart - yes, they were told, and told it was random.
@ Luke - that would be right if there is a cost of entering tournament-type payoffs. But I'm not sure there is in financial terms. Going for the job of CEO, or being on partner career paths in law and accountancy firms are free hits, financially speaking. But they do have non-pecuniary costs, such as having to do longer and arguably less pleasant work.

[Bobby Goren]

"Maybe successful people work hard because prior good luck has led them to think that work pays, whilst others are lazy because bad luck has reduced their confidence."

I believe this is already recognized, at least at the top of the income ladder, in top executive compensation. "If you want good people, you've got to pay them" seems to be in fashion only at the top of the pyramid.

For the rest of us a quote from Caddyshack's Judge Smails aka Ted Knight comes to mind: "You'll get nothing, and like it!"

[Luke]

Chris, thanks for that. On reflection, that may reinforce the rest of the post. To get to be a partner at, say Goldmans or one of the professional firms where you earn serious wedge, you have to signal that you won't just lounge about or retire after a couple of years like any rational person would. You do that be working stupidly hard, harder than is necessary. Who would do that but someone who was (overly?) confident of winning?

[john malpas]

Dont you need luck always?
Still in the military brains and risk taking are often profitable if you dont lose.
Eg General Patton, The desert fox etc.

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