Identity and Economic Incentives (with Eugen Dimant, Kwabena Donkor, Lorenz Goette, and Maximilian Müller)
We examine the extent to which identity-conforming investment decisions are driven by identity-specific beliefs and identity-specific preferences. We first present a model where identity distorts individuals' beliefs about uncertain outcomes and imposes psychic costs on identity-incongruent actions. Second, using two large field experiments on soccer betting in Kenya and the UK, we experimentally vary material incentives for betting on matches where soccer fans are supporters, haters, or neutral observers of the teams playing. Finally, we combine the model with respondents' portfolio allocations across the potential outcomes of different matches and find that, on average, respondents undervalue gains from identity-incongruent assets by 16% to 26%. Moreover, identity concerns lead respondents to misallocate 10% of their investment budget due to over-optimistic beliefs and an additional 15% to avoid psychic costs.