The 2008 collapse of Lehman Brothers was famously followed by one of the worst financial crises in the history of capitalism and by the Great Recession. But the crisis did not only affect economic outcomes. The public’s view of the financial system also worsened dramatically (Zingales, 2015). Anti-capitalist movements inspired by the US-born Occupy Wall Street movement spread around the world. Anti-market rhetoric spread around the world in the political debate, as well as in religious thought (Bartholomew, 2012; Francis, 2015). If anti-market rhetoric causally affects households’ investment decisions, the fact it peaks after crises might contribute to explain the long shadow of crises on aggregate economic outcomes. In a recent paper, I find that exposure to anti-market rhetoric causally reduces individuals’ willingness to invest in simple risky opportunities.
The main challenge for running such a test is the fact that variation and peaks of anti-market rhetoric coincide with major economic shocks, which in turn affect economic decision-making. One cannot obtain exogenous variation in households’ exposure to anti-market rhetoric, which is not confounded by other shocks to decision-making. To isolate the effect of rhetoric from other channels, I therefore randomly manipulate the salience of anti-market rhetoric in a controlled environment, and I compare the subsequent financial decisions of treated and control subjects.
For the manipulation, treated subjects read a text on the advantages and disadvantages of investing in stocks, whose wording builds on the language of the Occupy Wall Street movement as studied in Sociology (eg, see Schulz, 2015). Control subjects read a text whose content is the same, but whose wording is ideologically neutral. This manipulation is effective, because treated subjects choose more negative words to describe the stock market and investment banks than control subjects from the same list of 10 positive and negative words. At the same time, once asked after the experiment, neither treated nor control subjects thought they were exposed to any ideologically biased texts, which suggests that subjects reacted unconsciously to the prime.
After having established the validity of the experimental procedure, the paper tests for the effects of anti-market rhetoric on subjects’ investment behavior. Across three risky opportunities, subjects exposed to anti-market rhetoric are less willing to invest than controls. Primed subjects also invest substantially less money than controls across all opportunities. Interestingly, contrary to behavioral biases, anti-market rhetoric affects mainly the most sophisticated. In particular, college educated subjects, older subjects, and women react more than other demographic groups.
The welfare implications of the effects of anti-market rhetoric for the individual investor are ambiguous, because anti-market rhetoric reduces any type of investment, including positive NPV (net present value) opportunities, like retirement funds or ETFs (Exchange-traded funds), and negative NPV opportunities, like individual stock trading for retail investors.
Whether anti-market rhetoric affects financial decision-making through preferences or beliefs is another important aspect to investigate. I find that the distributions of elicited risk aversion parameters for control and primed subjects are indistinguishable, which is direct evidence that the prime cannot act through preferences. Instead, the evidence is consistent with the intuition that subjects exposed to anti-market rhetoric expect that the financial opportunities are unfairly biased against them. They believe they are less likely to gain after investing their money than what the objective probabilities of gaining tell them, even if the opportunities contain no uncertainty.
Isolating this negative causal effect of anti-market rhetoric on investment is important, because anti-market rhetoric is pervasive and peaks around economic crisis. It is at the very time when higher aggregate investment is needed to exit a slump and economic depression that sophisticated individuals shy away from investing. This feedback effect of anti-market rhetoric on decision-making can therefore be an important feature to understand why crises are often prolonged, and why investment and consumption stay low even after crises, when those that did not face large wealth shocks or income shocks could instead provide investment liquidity and increase their consumption.
Francesco D'Acunto is an Assistant Professor of Finance at the Smith School of Business of the University of Maryland.