“Losses loom larger than gains,” as the saying goes. But a new experiment reveals the psychology behind the expression and offers a different way to examine inequality between the rich and the poor.
In the experiment, two people each rolled a die for a better or worse payoff. When one person lost money and the other person won money, the inequality in their earnings left the loser with more negative emotions. However, when both people gained – even at different rates – this inequality had no emotional impact at all.
A recent working paper sums it up: “Losses are bad, and inequality is bad, but the combination is worse than the sum of its parts.”
“The question here is, controlling for whatever amount you’re getting, ‘Are you going to be made worse off if people do better than you?’ It really depends if you are making a gain or a loss,” says lead author and behavioural economist Guy Mayraz (University of Melbourne).
Mayraz designed the experiment with Social Interactions, Identity & Well Being Fellow Lara Aknin (Simon Fraser University) and Co-Director John Helliwell (University of British Columbia). Mayraz is also an alumnus of the CIFAR Azrieli Global Scholars program.
Economists have typically studied inequality through observational statistics. These numbers offer a wealth of information but cannot always demonstrate a causal link. To isolate for the emotional response to inequality, Aknin, a psychologist, modeled the experiment after similar ones she had conducted with her Helping and Happiness Lab. The group recently ran another variation of the experiment and may gather more data to build on the initial 287-person study.
This small experiment can help illustrate contemporary economies, like the situation in the United States. The top one per cent of American households has received the majority of economic gains in recent decades, while the bottom half’s share has plummeted, according to the World Happiness Report 2017 co-edited by Helliwell. The report shows the top one per cent’s income is equivalent to the share of the bottom 70 per cent.
The combination of losses at the bottom with continued gains at the top compounds this sense of inequality, Mayraz says.
“It’s doubly important that the poor are actually gaining both because they will be better off and because that’s what’s going to determine whether they’re going to suffer from the fact that the rich have more,” he says
Researchers found the winners in the dice experiment also experienced some negative emotions when the other participant lost. In both cases, knowledge of the other participant’s results in a gain-loss situation led to more negative emotions.
This experiment may demonstrate why some people shelter themselves from knowledge of how the other side lives. Mayraz cites examples of “social isolation” where rich people in certain societies rarely use public services and can close themselves off from poverty. Similarly, the poorest communities are not aware of how the rich live and that may be better for them – emotionally speaking.
“From a narrow perspective of protecting their emotions that may be a rational thing to do,” Mayraz says.
“But even if that’s true, you can still make the argument that that situation may be politically bad if people don’t have any idea how unequal their society is.”
In the real world, income is not as fair as a roll of a die and the stakes are much higher than a couple of dollars. Inequality also comes with stressors – from making a mortgage payment to putting food on the table – that also take an emotional toll. People may feel an outcome is unfair, “but when losses are involved there would be an additional component that is otherwise absent,” the authors write.
“Losses change the experience of inequality” is a working paper that was published March 4, 2017.