Wealth inequality has become a hot topic in recent years, with the likes of Thomas Piketty leading the way in urging policy makers across the world to address what he perceived as the central ill of our time.  Despite a growing consensus, there remains concern that the relative measure of poverty used by so many in the field is a poor yardstick by which to gauge the wellbeing of people.

New research from University College London suggests a better way of measuring wealth inequality might be via the ways we experience it.  The researchers wanted to overcome a flaw they perceived in the Gini coefficient, which is the traditional method for calculating inequality in a society.

“Some of the dimensions along which inequality is measured are best conceived as individual attributes, of which you simply have more or less, like height,” they explain. “But other dimensions—like wealth—are best conceived of as differences between people in their relationships with others.”

On the edge

The researchers argue that it is largely differences in wealth on the edges of our social networks that form the basis of the inequality we experience in every day life.  For instance, in their model, if individual A has a wealth of 10, individual B has a wealth of 4, and individual C a wealth of 3, then this should create a Gini coefficient of 0.41, but the standard Gini coefficient creates a reading of just 0.27.

These kind of errors become particularly noticeable when working with small populations.  The new approach was tested on farm communities in Nicaragua, and was able to produce a more accurate representation of the inequalities in these communities.

“Fixing the small numbers bias is not the main contribution of our paper,” the authors conclude. “It is that we have provided a way of understanding inequality consistent with our intuitions about how we experience economic disparities, that is by pairwise comparison of one’s own wealth or income with that of others.”