A popular meme in media and social media is commentary about income distribution. The typical chart distributes the population into fifths or quintiles, like the chart shown here.
The popular interpretation of this chart is to find your income level at left and conclude you are stuck in that quintile forever – and your prospects for advancement are non-existent.
Did you know this interpretation is wrong?
Most people do not stay in the same quintile. People look at this chart, figure out where they are, and incorrectly assume they stay there forever – but the reality is that the people in the n-th quintile in 1990 are not the same group in 2000 or 2010!
Most begin their working life in the bottom or second quintile and over the course of their work life, rise to the 4th or 5th quintile. At retirement, their income (from investments, savings, pensions, government programs) causes them to fall downwards by one or two quintiles. On the other hand, many people will fall into the 5th quintile – even the highest few percent of income – the day they sell their fully paid for home whose price has risen due to inflation (or technically, due to the Fed’s devaluation of the dollar).
The logical fallacy is to see this chart and assume that everyone stays in the same position over time.
A valid interpretation is that the 5th quintile sees rising incomes while others do not, but we go on to make the logical fallacy assumption that this is the same group of people, year over year.This is part of our brain’s ability to quickly jump to conclusions (Kahneman’s System 1 style thinking), which are often wrong!
The logical fallacy is to assume that only those in the 5th quintile today receive the rising income benefit – when in reality, many people will move up and down between the quintiles, over time.