Why Net Worth Misrepresents Wealth Effects and What to Do About It

Wealth plays an important role in social
stratification but the results that can be obtained when analyzing wealth as a
predictor variable depend on modelling decisions. Although wealth consists of
multiple components it is often operationalized as net worth. Moreover, wealth
effects are likely non-linear, but the functional form is often unknown. To
overcome these problems, we propose to 1) split up net worth into gross wealth
and debt and evaluate their joint effect and 2) use non-parametric Generalized
Additive Models. We show in a
simulation study that this approach describes systematic wealth differences in
more detail and overfits less to random variation in the data than standard
approaches. We then apply the approach to re-analyze wealth gaps in educational
attainment in the US. We find that the operationalization of wealth as net
worth results in a misclassification of which children have the best and the
worst educational prospects. Not negative net worth is associated with the
worst educational prospects but only the combination of low gross wealth and
low debt. The most advantaged group are not only children with high net worth
but all children with high gross wealth independent of the households’ amount
of debt.