Buckle up: Money’s wild ride through the world of social identity

Imagine you are waiting at a crosswalk. What steps can you take to make sure you cross safely? According to recent research from the University of Nevada, you should pay attention to the model of the oncoming car. If the car is expensive, watch out! The research found the odds of the driver yielding to the pedestrian decreased by 3% for every $1000 increase in the car’s value. 

The researchers used the car price as a proxy for social status, concluding that owners of expensive cars “felt a sense of superiority over other road users.”

In another study from Finland, researchers found that “self-centred men who are argumentative, stubborn, disagreeable and unempathetic are much more likely to own a high-status car.” But they also found that conscientious people who are “respectable, ambitious, reliable and well-organised” drive high-status cars. Pick the group to which you think you belong.

The studies show how financial decisions are influenced by more than just rational calculations of costs and benefits. Our social identity — our sense of self in relation to groups — is a key driver of economic behaviour.

A seminal paper on economics and identity by Nobel laureate George Akerlof and Rachel Kranton argues that people follow “prescriptions” for behaviour based on social categories and self-image. In the dynamic world of gender identity, for example, we see a clear evolution in norms over the years. What’s considered appropriate for women today is a far cry from what was appropriate two generations ago. As the identity researcher Rachel Kranton put it, “It’s not that women’s brains and bodies have changed; it’s our evolving understanding of gender that’s making the shift.”

This “identity economics” has important implications for financial advisors seeking to understand clients and guide their decision-making. Advisors must recognize the motivations that underlie clients’ financial priorities and leverage them to encourage financial well-being.

Social identity defines “appropriate” choices

We gain utility (tangible benefit) not just from absolute income levels, but also from making “appropriate” financial decisions befitting our social identities. A corporate executive may feel pressure to dress expensively to fit in with peers. A retiree may choose to donate generously to charity to meet community expectations. Both decisions involve trade-offs: they have economic costs but provide social rewards.

While social identity offers benefits, it can also undermine financial well-being. A recent experimental study with U.S. high-school students showed, for example, that minority students in lower-income schools face peer pressure that discourages effort and achievement, leading them to avoid advanced classes — which has negative long-term financial impacts. Similarly, people may take on excessive debt to maintain living standards that confer status among neighbours and colleagues, the well-known “Keeping up with the Joneses” effect. People take risky investment bets, save too little, and overspend in hopes of climbing the social ladder or signalling their social status. Such status-seeking choices often undermine financial security.

Status and financial advice

In the last column, we discussed the Electrolux washing machine’s pay-per-wash model that failed as Swedish consumers felt it threatened their middle-class identity. Similarly, some investors may see commission-based advice as befitting lower status groups compared to fee-based advice.

Financial advisory firms must consider how their business models interact with clients’ social identities. Models that enhance clients’ status are more likely to succeed. Fee-based advice may confer higher status by appealing to professional class identities. It also enables objective guidance aligned with client interests, not sales targets. Aligning services with client identity goals should be an imperative in financial services, through fee-based advice or commission model, depending on the client group.

To advise effectively, financial professionals must help clients understand the role their social identities play and the related behavioural prescriptions. This deeper discovery enables advisors to align recommendations with identity goals, enhancing client acceptance.  

Advisors can also help clients balance identity and financial motivations through “co-creation” — actively involving clients in developing and choosing financial solutions. This collaboration confers a sense of control while encouraging better choices. Ultimately, appealing to emotions and identity, not just presenting data, is key to guiding clients’ decision-making and delivering successful outcomes.

Advisors would do well to remember the famous words by Canadian media theorist Marshall McLuhan: “Everybody tends to merge his identity with other people at the speed of light. It’s called being mass man.”