In recent years, there has been much debate about how to redistribute wealth between the wealthiest and the least resourced segments of the population. This debate has intensified over the past two years because of the alarming increase in wealth concentration between the richest 1 percent of the population and the rest.

A group of researchers from Stanford University, Harvard University, Eötvös Loránd University (Hungary), and the Vienna University of Economics and Business conducted four studies in which they discovered that people tend to err on the lower side of the income figure that we believe the richest percent of the population receives.

What researchers discoveredThe researchers conducted several experiments in which they attempted to define the perception of wealth of the wealthiest 1 percent of the population by the rest. To do this, 990 random U.S. residents were asked to estimate annual household income thresholds for various U.S. income percentiles.

As a result, the income threshold for the richest 1% of the population was underestimated, with the accuracy of the income estimate increasing as we went down the percentile. That is, participants were fairly accurate in knowing how much households in the middle and lower percentiles earned, but as we went up, the margin of error increased, and it became more noticeable for the richest.

And they continued to investigateThe study authors didn’t just stick with one experiment, but instead ran several scenarios to compare the results and see if they were inconsistent.

The results pointed in the same direction across all studies: Participants underestimated the average income of the top 20% of the richest population, but they did not estimate the average income of the bottom quintile of the poorest population. That is, they knew how much low-income households earned but systematically miscalculated high-income earners.

Representation of precision in estimating income by percentiles

You are only rich after a certain amountThe findings of this study suggest that underestimation of income at the top percentile of the income distribution may be due in part to a cognitive bias known as scope insensitivity or scope neglect.

This bias affects the representational capacity of certain quantities. The participants have perfectly assimilated what it means to take a number that they are familiar with (€1,000, €10,000, €100,000), but the numbers that they are not familiar with (€100,000 million) are distorted, moved into an abstract and vague category of “rich”. For example, a billionaire who earns €1 million does not perceive this profit in the same way as a person who usually earns €25,000 a year and suddenly earns €1 million.

Why is this discovery important? The erroneous perception of income inequality constitutes a significant obstacle to the development of wealth redistribution policies, exacerbating the wealth gap and, with it, the social inequality of countries.

What these researchers discovered is that people tend to underestimate how much the top 1 percent of the ultra-rich population earns, which in turn underestimates the true levels of inequality between people with fewer resources and millionaires.

Given that the rise in inequality is largely due to the concentration of wealth among the top 1 percent, this underestimation undermines support for measures to redistribute wealth, such that a billionaire pays the same taxes as a supermarket clerk, or a multinational corporation pays the same as a local fruit shop.

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Image by Alexander Gray on Unsplash