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The CA/D framework has been applied to various areas of study, ranging from scientific productivity (Merton 1995), athletic ranking/prominence (Gladwell 2008), and health disparities (Dannefer 2003) to racial disparities in mortgage lending (Rugh et al. 2015). The scenarios used to illustrate systematic CA/D processes (Figure 2.1) are often taken from the financial world, with the accumulation of compound interest on an investment an especially common analogy for explaining the growing gaps between the “haves” and the “have-nots.” Figure 2.1 presents three scenarios that demonstrate CA/D processes (see Rigney 2010; Diprete and Eirich 2006).

The first scenario describes two households (A and B) that invest different amounts of wealth, respectively $2,000 and $1,000, and are offered a 5% interest rate that is compounded annually. While the numerical difference between the two at the beginning of the year is $1,000, the gap will increase to $1,050 a year later, as household A adds $100 to its initial investment, while household B adds only $50. Over the next fifteen years, the numerical gap will continue to grow and, by the end of the period, the gap will have increased to $2,079. However, as long as the interest rate remains at 5%, the ratio of the difference between the two investments will remain intact at 1:2. This analogy reflects a scenario in which two households, having different levels of wealth as a starting point (endowments), but equal opportunities for education and employment, are faced with proportional returns on education and equal access to housing, financial assets, and credit.

Figure 2.1. CA/D processes Created by the author

If, instead, the interest rate correlates with the size of the principal—for instance, 5% on $1,000 but 10% on $2,000 (Household C)—then both the magnitude of the gap and the ratio between the two investments will grow over time (DiPrete and Eirich 2006: 272–273). This form of CA represents a case in which early advantages (the price appreciation of an expensive home in a desirable neighborhood partly paid for by financial gifts from parents) tend to grow at greater rates than smaller advantages (a home in a less sought-after location purchased with no parental assistance), resulting in growing wealth inequalities over time in both absolute and relative terms.

A third scenario (Household D), a variant of the second scenario, portrays a gradual accumulation of “disadvantages” associated with credit and loans that need to be paid back with interest: “Compound interest turns wealth into more wealth and debt into more debt” (Boshara 2004: 99). As demonstrated in the case of Household D, which took a loan of $2,000 with an interest rate of 6%, this general rule produces situations of extreme financial loss and increasing cumulative inequality over time, particularly between Households D and C. The financial crisis of 2007–2008 is a case in point. It affected millions of American households, leading to cumulative disadvantages, a rise in home foreclosures, and a rise in debt that often resulted in negative net worth as well as in credit denial, a lower standard of living, and detrimental health outcomes (Ferraro and Shippee 2009).

In this regard, two points are worth noting. First, in light of the fact that net worth, unlike other measures of socioeconomic attainment such as education and earnings, is unbounded and has no “ceiling” or “floor” constraints, CA/D processes can generate an accumulation of great fortune or a decline into negative territory, producing extreme material vulnerability. Second, in addition to economic shocks, detrimental events earlier in life—such as disability, divorce, or incarceration—could have a long-term bearing on wealth attainment later in life and across generations. For example, a recent study on the effect of incarceration on the ownership of assets (bank accounts, vehicles, and homes) found that CD processes transcend an individual lifespan, leading to what the authors termed “cycles of cumulative disadvantage”:

Incarceration reduces assets among already disadvantaged young men and their families, and this asset poverty, in turn, further disadvantages the children of formerly incarcerated men. (Turney and Schneider 2016: 2097)

This is not to say that, at the micro level, advantages and disadvantages experienced by the individual are always deterministic in the way predicted by the CAD model, or that they inevitably lead to rising inequality, as depicted in Figure 2.1. As will be explored later in the book, some events in people’s lives may perpetuate CA/D processes, while others may mitigate them. The imprint that life-course events leave on wealth attainment largely depends on the social context within which these events are embedded.