Identity Economics

The Basic Idea

Imagine you’re buying a new shirt at the mall. What factors do you think will impact your decision when choosing your new clothing item?

If humans are perfectly rational decision-makers, we would only be influenced by the cost of a shirt and whether it fulfills basic needs, like comfortability and fit. However, according to identity economics, who we are has an impact on our economic decisions. If you identify as a fashionista, you might be influenced to buy a pricey, top-of-the-line shirt from a respected brand. If you identify as an athlete, you might opt for a jersey. If you identify as a parent, you might want to shop at the same stores as other parents.

All these potential influences demonstrate that psychology, sociology and economics are intertwined. Identity economics recognizes this link and predicts behavior by incorporating one’s sense of self into the decision-making process. As a result, it reflects real life behavior within economic models.

Because identity is fundamental to behavior, choice of identity may be the most important ‘economic’ decision people make. Individuals may — more or less consciously — choose who they want to be. Limits on this choice may also be the most important determinant of an individual’s economic well-being.

– George Akerlof and Rachel Kranton in their 2002 paper, “Economics and Identity”1

Key Terms

Utility Maximization: traditional economic theory that suggests the only factors that impact our decisions are economic. Based on this theory, we will choose options that benefit us monetarily.

Social Identity: a person’s sense of self based on what groups they belong to. Social identity can have a large influence on how we behave as it causes us to divide people into categories of ‘them’, people who don’t belong to our group, and ‘us’, people that belong to our group.2

In-group bias: our tendency to give people in the same group as us preferential treatment. For identity economics, this means that whichever group we identify with can lead us to make decisions that will benefit that group over others.

History

Traditional economic theory suggests that humans are rational decision-makers and proficient at knowing what decision will maximize their personal utility. For traditional economics, maximizing utility is all about making the smartest decision in terms of money. However, in the 1950s and 60s, psychologists began to notice that real life behavior did not reflect traditional economic theory. Indeed, human beings were impacted by factors such as cognitive biases, emotions, and cultural differences. The field of behavioral economics, which accounted for these extra influences when predicting human behavior, grew in popularity. It became especially popular when Daniel Kahneman – considered the father of behavioral economics – was awarded a Nobel Prize in 2002 as a psychologist for his contribution to the field of Economics.3

Around the time of Kahneman’s win, two American economists were also revolutionizing the field. George Akerlof and Rachel Kranton put forward a paper, “Economics and Identity,” that provided a new way to examine and predict human economic behavior: identity. The paper was spurred by a letter Kranton wrote to Akerlof in 1995 in which she shared her beliefs that human agency was missing from economic models.4 In their 2002 paper, Akerlof and Kranton suggested that the psychology and sociology of identity needed to be incorporated into economic models of behavior.

Their findings suggested that one’s sense of self, and what social groups one belonged to, could influence individuals to make decisions that did not fit with rational predictions or utility maximization. In particular, Akerlof and Kranton suggested that people tend to avoid making decisions that are in conflict with their identity, due to both personal commitment to their sense of self and the influence of social norms.1 The desire to adhere to one’s identity could even cause individuals to make decisions that are not in their best interest, which highlights that human beings do not always behave rationally.

One of the most prominent identity categories that Akerlof and Kranton recognized as being influential was gender identity. According to their paper, gender identity impacts behaviour beyond pure biological differences. For example, in order to adhere to a perceived gender ideal, individuals sometimes mutilate their own bodies: someone might get their ears pierced, or take steroids to increase muscle mass. As Akerlof and Kranton also noted, career-specific gender norms can cause individuals of other genders to feel as though they must shed their gender identity in order to perform well in their respective field. For instance, they found that female lawyers believed that being a good lawyer meant acting like a man.1

Based on the influence of identity on decisions, Akerlof and Kranton came up with a new standard utility function that integrated psychology and sociology into economic thinking.5 Since the success of their initial paper, Akerlof and Kranton continued their collaboration to further examine the impact of identity on economics and released a book in 2010 called Identity Economics: How Our Identities Shape Our Work, Wages and Well-Being. The book extensively demonstrates how people’s conception of who they are, or who they want to be, impacts their economic decisions and have consequences on their economic freedom.6

Consequences

Economic theory seeks to develop accurate models and equations that can predict human behavior. The incorporation of identity into economics can help economists refine their standard utility function to show that there is such a thing as identity utility – a desire to maintain one’s belonging to a social group.7

Akerlof and Kranton’s research provided an explanation to irrational behaviour that traditional models had failed to do in the past. Identity economics demonstrates external influences on behavior, such as pressure from social identity. Indeed, your identity doesn’t only impact your own decisions, but can also impact the decisions of others in your groups. If a popular athlete starts wearing a particular brand, people who want to identify with the athlete group might also start wearing that brand. Additionally, identity economics reveals why behavior patterns may change over time — as society and culture evolve, so do our identities and decisions.

Identity economics can also be a useful tool for agencies and government policies. By knowing there are factors other than monetary gain that impact decisions, marketing can target identity rather than rationality. A government trying to dissuade individuals from smoking could use identity economics to its advantage. Instead of increasing the price of cigarettes, they can aim to change society’s perception of smoking so that people don’t want to associate themselves with the smoker identity. Similarly, companies can use identity economics to help them create more effective advertisements. Brands can target a particular social group so people come to associate a product with their own identity (or an identity they aspire to).

Controversies

Identity is an incredibly complex phenomenon, however, Akerlof and Kranton suggest that it can be reduced to a formula by adjusting standard utility to incorporate social norms. However, it is difficult to predict to what extent identity impacts economic behavior, since identity consists of many different factors. Whilst many people agree that identity impacts behavior, many disagree that it can be simply reflected through economic models. The fact that Akerlof and Kranton made their 2010 book palatable for a mass audience with little psychological or economic background may have increased room for criticism.7

Some might argue that norms and identity are separate influences that should not both fall under the umbrella term ‘identity economics’. It is difficult to discern the difference between identity as an individual choice and identity as a category forced upon people by society. Suggesting that one’s social group is the largest influence over economic decisions also suggests a lack of freedom in making choices. We often identify as part of many different social groups, and identity economics does not offer a clear way to analyze which identities have the greatest influence over behavior.8

Education and Identity Economics

It can be extremely difficult to get students motivated to pursue their education. When school feels like an obligation, students may not perform well due to a lack of meaningful attachment to their studies. While some behavioral science theories (like the behavioral perspective, which claims all behavior is a reflection of conditioning) suggest that providing students with rewards can help motivate them to study, identity economics could provide a new tool to increase student engagement.

In a 2002 literature review, Akerlof and Kranton suggested that student identity is the primary motivation for studying, and that a school’s success depends on how well students integrate into the school’s social setting.9 One study they reviewed revealed that students tend to divide themselves amongst groups (like jocks, nerds or theatre geeks), and that the group an individual belongs to impacts their academic performance. This led Akerlof and Kranton to believe that after choosing a social group, students then choose how much effort they want to put into their studies because of a desire to fit in with their group.9 A stereotypical example would be a jock deterred from studying due to a desire to fit in by playing sports after school, instead of attending tutoring.

The values a school emphasizes can also impact what subjects students do well in. For example, if a school prides itself on an annual theatre production, students might put more effort into theatre than sports to try and fit in with the social setting. Alternatively, Akerlof and Kranton found that students whose identity conflicted with the school’s identity, and therefore who did not want to assimilate into the school, showed very low levels of effort. Akerlof and Kranton also postulate that one reason students in private schools tend to have better grades than those in public schools is because private schools are able to perpetuate a particular ideal and identity, whilst public schools are targeted towards diverse communities.9

Identity economics therefore reveals how important it is that schools cultivate a social identity that students feel compelled to adhere to. If students and teachers are both working together towards a common purpose, we are likely to see academic performance improve.10

Robbers Cave Experiment

A famous experiment that helps support identity economics is called the Robbers Cave Experiment. The experiment was conducted by social psychologist Muzafer Sherif, who believed that group conflict can arise due to competition over limited resources, known as realistic conflict theory. This opposed the prominent views in the 1950s that posited individuals, especially men, were conflict-prone by nature. Sherif believed context mattered.11

In the experiment, Sherif ran a boy’s camp in a remote location in Oklahoma. Twenty-two  eleven-year-old boys were split into two groups and sent to opposite sides of the campsite. They had no idea that the other group existed and the boys were unaware that they were part of an experiment. In order to create a shared identity, shared activities were held within each group for the first week of the experiment which, to Sherif’s surprise, even resulted in the formation of group names. In the second week, after a group identity had been formed, the two groups met and competed against one another. This quickly resulted in name-calling, taunting, and physical acts of aggression. This behavior heavily supported the theory of in-group bias.12

For the third component of the study, however, Sherif wanted to show that when groups need to work together for a common goal, conflict diminishes. Sherif created situations in which the groups’ cohesion mattered if they wanted to succeed. For example, when a supply truck broke down, the groups had to work together to carry supplies to camp. After the boys engaged in these activities, there was less conflict between the groups.12

The Robbers Cave Study demonstrates that contact alone is not enough to reduce conflict between groups. Instead, there must be a common objective that groups work towards. This finding shows that people’s sense of self, not just their physical proximity to social groups, influences behavior. 12

Related TDL Content

Implicit Bias, Gender – And Why We Are All Culprits

Our own identity impacts how we behave and the perceived identity of others can influence how we treat them. In particular, perceived gender norms influence our perception of others and can cause us to feel prejudice towards those that do not adhere to them. In this article, our writer Namrata Raju explores some of her own gender biases and the impacts that these biases have on trans and homosexual individuals.

TDL Brief: The Real Drivers of Voter Behavior

In the wake of the 2020 election, The Decision Lab took a particular interest in the different factors that motivate voter behavior. As this article explains, one of the ways to increase voter turnout is to play into people’s desire to self-identity as someone who votes. Because people want to appear to embody the identity of a contributing member of society and democracy, campaigns should focus on promoting ‘voters’ as a social group rather than focus on the act of voting itself.

Sources

  1. Akerlof, G. A., & Kranton, R. E. (2000). Economics and Identity. Quarterly Journal of Economics, 115(3), 715-753. https://doi.org/10.1162/003355300554881
  2. McLeod, S. (2019). Social Identity Theory. Simply Psychology. https://www.simplypsychology.org/social-identity-theory.html
  3. Behavioral Economics. (2021, February 3). The Decision Lab. https://thedecisionlab.com/reference-guide/economics/behavioral-economics/
  4. George Akerlof. (2021, March 30). The Decision Lab. https://thedecisionlab.com/thinkers/economics/george-akerlof/
  5. Identity economics. (2019, April 1). Behavioral Economics. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/identity-economics/
  6. Identity Economics. (2011, September 26). Princeton University Press. https://press.princeton.edu/books/paperback/9780691152554/identity-economics
  7. Davis, J. B. (2011). Review of Identity Economics by Akerlof and Kranton. Economics and Philosophy, 27(3), 331-338. https://doi.org/10.1017/S0266267111000253
  8. Fine, B. (2008). The economics of identity and the identity of economics? Cambridge Journal of Economics, 33(2), 175-191. https://doi.org/10.1093/cje/ben036
  9. Akerlof, G. A., & Kranton, R. E. (2002). Identity and schooling: Some lessons for the economics of education. Journal of Economic Literature, 40(4), 1167-1201. https://doi.org/10.1257/.40.4.1167
  10. Matsangou, E. (2019, May 28). Identity economics: How financial decisions are driven by our sense of self. World Finance. https://www.worldfinance.com/wealth-management/identity-economics-how-financial-decisions-are-driven-by-our-sense-of-self
  11. Shariatmadari, D. (2018, April 16). A real-life Lord of the flies: The troubling legacy of the robbers cave experiment. The Guardian. https://www.theguardian.com/science/2018/apr/16/a-real-life-lord-of-the-flies-the-troubling-legacy-of-the-robbers-cave-experiment
  12. Robbers Cave Experiment Definition. (2016, January 20). Psychology. https://psychology.iresearchnet.com/social-psychology/social-psychology-experiments/robbers-cave-experiment

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