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The Price of Identity: Overoptimism and Congruence Concerns

Author

Listed:
  • Kwabena Donkor
  • Lorenz Götte
  • Maximilian W. Müller
  • Eugen Dimant
  • Michael Kurschilgen

Abstract

We examine how identity influences economic decision-making, using field experiments on sports betting to measure belief distortions and identity-driven preferences. We find that people overestimate the likelihood of identity-aligned outcomes by 10–18%, and allocate 20% more of their betting budget to teams for which they have an affinity than to neutral teams. Using a structural model of portfolio allocation, we show that overoptimism accounts for 30%–44% of this investment gap, while the remaining 56%–70% stems from an aversion to betting against one’s favored team, even when such bets offer higher expected returns. Our estimates suggest that this aversion is equivalent to discounting gains from identity-incongruent outcomes by 17%–27%. We also provide evidence for the “identity-threat response” theory: when individuals perceive their identity as under threat – such as after their team’s poor performance – they strengthen their commitment, reinforcing identity-driven betting. Our findings raise policy concerns, as identity-driven biases may exacerbate financial harm not only in the rapidly expanding sports betting market but also in broader consumer and financial decision-making contexts where identity affects choices.

Suggested Citation

  • Kwabena Donkor & Lorenz Götte & Maximilian W. Müller & Eugen Dimant & Michael Kurschilgen, 2023. "The Price of Identity: Overoptimism and Congruence Concerns," CESifo Working Paper Series 10860, CESifo.
  • Handle: RePEc:ces:ceswps:_10860
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    References listed on IDEAS

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    1. Carey K. Morewedge & Simone Tang & Richard P. Larrick, 2018. "Betting Your Favorite to Win: Costly Reluctance to Hedge Desired Outcomes," Management Science, INFORMS, vol. 64(3), pages 997-1014, March.
    2. Lorenz Goette & David Huffman & Stephan Meier, 2006. "The Impact of Group Membership on Cooperation and Norm Enforcement: Evidence Using Random Assignment to Real Social Groups," American Economic Review, American Economic Association, vol. 96(2), pages 212-216, May.
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    Cited by:

    1. Diego Marino Fages, 2024. "Motivated Forecasts: Experimental Evidence from the Presidential Elections in Argentina," Discussion Papers 2024-08, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    2. Adam Brandenburger & Paolo Ghirardato & Daniele Pennesi & Lorenzo Stanca, 2024. "Event Valence and Subjective Probability," Carlo Alberto Notebooks 717 JEL Classification: D, Collegio Carlo Alberto.

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    More about this item

    Keywords

    identity; investments; experiment;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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