The Price of Identity: Overoptimism and Congruence Concerns

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.