Reply to van Hoorn: Social comparisons of “enough” are an informational signal

In response to our article (1), van Hoorn (2) suggests that our analysis focuses too narrowly on perceived need as the mechanism linking inequality to increased risk taking. The author does not dispute the evidence we present for the role of perceived need, but proposes an additional mechanism linking inequality to risk taking. The proposed mechanism is an “informational” signal: if others have done better than the person themself, it may be necessary to take greater risks.

We agree with van Hoorn (2) that there are likely to be multiple mechanisms linking inequality and risk. The associations observed between state-level inequality and risk taking are so large that it would be surprising if they were explained entirely by one pathway. However, we do not agree with the sharp contrast drawn between our explanation (perceived need) and the alternative (an informational signal).

The research cited in van Hoorn (2) concerns the effect of relative income on well-being rather than risk taking. Social comparisons convey two kinds of conflicting information for well-being. First, upward comparisons convey that one is worse off than the reference point (i.e., low status), thus lowering well-being. Second, the success of others conveys that one’s own opportunities for upward mobility are good (an informational signal), thus raising well-being (3). Van Hoorn (2) appears to be applying the same contrast between lower status versus informational signals about opportunity to our study (1). However, the comparison is inappropriate in the context of risk taking.

Our explanation is that people are often uncertain about how much money is too little as opposed to “enough,” so they look to successful others to judge how much they need to be satisfied. In our view, this constitutes a form of informational signal. It is not very different from the van Hoorn’s (2) alternative that, “considering others that have done better than themselves may lead individuals to believe that improving their economic position requires them to take (even) more risk.” Indeed, our conclusion is, “Rising inequality may change what individuals consider to be enough, and therefore the risks they are willing to take to gain more” (1).

There is, however, a subtle difference in the two signals proposed. Whereas we focus on a perceived need to earn more, van Hoorn focuses on perceived opportunities to earn more. We agree that both may be important. Both Hirschman’s theorizing (4) as referenced in van Hoorn (2), and most of the evidence cited (5, 6) concerned underdeveloped economies, such as Russia following the disintegration of the Soviet Union. When everyone is poor, success among a few is a welcome signal that success is possible. Hirschman (4) theorized that as economies become more developed, the value of inequality for signaling opportunity would decline. Given the human tendency to adapt to new successes and still feel the need for more, we expect that perceived need is a more universal phenomenon.