What soccer fans can teach us about irrationality. Study finds sense of identity can distort financial decision making

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Classical economics posits that investment decisions are driven by rationality—a clear-eyed evaluation of risks and rewards. However, new research by Kwabena Donkor, an assistant professor of marketing at Stanford Graduate School of Business, finds that identity distorts our financial choices, leading us to overvalue investments that reinforce our sense of self.

"People don't just invest with their wallets—they invest with their identity," says Donkor, a faculty fellow at the Stanford Institute for Economic Policy Research.

In a novel field study involving soccer fans, Donkor and several colleagues uncover evidence of how identity can skew economic thinking.

The researchers ran a series of experiments focused on fans who placed nearly 40,000 bets on English Premier League matches during the 2021–22 season. Participants—nearly 800 from Kenya and 1,600 from the United Kingdom—were given a budget and asked to place bets on upcoming matches. They received winnings based on the outcomes of randomly selected games.

Most of the participants were longtime supporters of a particular team (Manchester United was their top favorite). They were more optimistic about their favorite teams, betting 20% more on them. They rated their teams as having a 10% to 18% higher chance of victory than other teams, even when presented with forecasts from professional oddsmakers suggesting otherwise. These results persisted even after accounting for factors such as personal beliefs and appetite for risk.

The study also finds that participants placed a lower value on gains not aligned with their identity—what the researchers referred to as an "identity tax." Fans effectively devalued these neutral bets by 17% to 27%. For poorly performing teams, this "tax" could soar as high as 47%, reflecting a strong emotional impulse to support their favorite team even when the odds were against it.

The research, detailed in a paper co-written with Lorenz Goette of the National University of Singapore, Maximilian Müller of the Toulouse School of Economics, Eugen Dimant of the University of Pennsylvania, and Michael Kurschilgen of UniDistance Suisse, shows that identity-driven preferences explain much of the gap in bettors' behavior.

Simulations showed that distorted beliefs due to identity account for as much as 44% of the difference in fans' betting behavior. The remainder stemmed from preferences rooted in identity itself—people were willing to sacrifice potential gains to support options that aligned with who they are.

Donkor and his co-authors, who include some fellow soccer fans, saw the intensity of fandom as "a fitting context to test identity concerns for decision-making.

"People value alignment with their identity more than they value potential profits," he says. "When it comes to money, loyalty isn't cheap." (Once a Premier League follower, Donkor says he currently doesn't support any team.)

Moving the goalposts

The study's findings have far-reaching implications for understanding economic behavior, particularly in areas like consumer finance, brand loyalty, and even political decision-making. The identity tax explains why people invest heavily in domestic companies when foreign firms might be more profitable or disproportionately buy their employer's stock when diversification might offer better returns.

Donkor and his colleagues argue that this finding provides a new lens for designing financial products and policies. To address the identity-based biases, they suggest creating more diversified financial products that take these influences into account.

Financial education, Donkor adds, needs to move beyond just explaining risks and returns. It should help individuals recognize and manage the identity-based biases that may cloud their judgment.

He says that companies that rely on brand loyalty or cater to identity-driven markets—such as sports teams or lifestyle brands—could use this research to fine-tune their strategies. For example, targeted advertising and product offerings can be designed to align more closely with customers' identities, making it easier to capture and retain their loyalty.

Alternatively, businesses can use these insights to address consumers' misconceptions, helping them make more informed decisions that balance emotional and rational factors.

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These findings also challenge some of the basic assumptions of traditional economics. Where classical models would expect demand to fall as prices rise, the study suggests why luxury goods or other pricey products might continue to see strong demand, regardless of cost. Consumers are willing to pay more to uphold their identity or social status, Donkor says.

Furthermore, the research hints at how consumers view different products. Items that align with a person's identity are likely to be seen as complements rather than substitutes. For example, Donkor says a consumer who identifies strongly with sustainability might view eco-friendly products as essential enhancements to their lifestyle, even if they're similar to comparable, less expensive goods.

Ultimately, these findings could improve our thinking about the biases that influence our financial lives. As the researchers point out, acknowledging the role of identity in decision-making is one key to designing better policies, creating more effective financial products, and ultimately improving individual welfare. "If we ignore identity," Donkor concludes, "we miss the bigger picture in decision-making."

More information: Identity and Economic Incentives. www.gsb.stanford.edu/faculty-r … -economic-incentives

Provided by Stanford University