Investment in stocks led to a more right‐leaning outlook merit & deservingness, personal responsibility, & equality, & a shift to the right on policy questions, driven by decreasing distrust of markets

How Markets Shape Values and Political Preferences: A Field Experiment. Yotam Margalit  Moses Shayo. American Journal of Political Science, May 22 2020. https://doi.org/10.1111/ajps.12517

Abstract: How does engagement with markets affect socioeconomic values and political preferences? A long line of thinkers has debated the nature and direction of such effects, but claims are difficult to assess empirically because market engagement is endogenous. We designed a large field experiment to evaluate the impact of financial markets, which have grown dramatically in recent decades. Participants from a national sample in England received substantial sums they could invest over a 6‐week period. We assigned them into several treatments designed to distinguish between different theoretical channels of influence. Results show that investment in stocks led to a more right‐leaning outlook on issues such as merit and deservingness, personal responsibility, and equality. Subjects also shifted to the right on policy questions. These results appear to be driven by growing familiarity with, and decreasing distrust of markets. The spread of financial markets thus has important and underappreciated political ramifications.

Discussion

Financial markets have an increasing presence in countries throughout the world. From the stock market tickers on the TV screens at the local store, through the ups and downs in people's pension savings, to the torrent of tweets of the current U.S. president about the Dow Jones' performance, more and more people are exposed to financial markets. However, little is known about the political ramifications of this trend. This article presents the first experimental analysis of how mass exposure to financial markets affects social values and preferences over economic policies. We find that engagement with financial markets brings about a rightward shift in values and attitudes. This effect is quite general and, if anything, appears to be stronger among voters on the left. Furthermore, the effect is most pronounced when individuals invest in actual stocks rather than in nonfinancial assets, a pattern consistent with an Exposure Channel. The most likely mechanism underlying these shifts is growing familiarity with and decreasing distrust of markets. This is reflected in growing confidence in people's ability to successfully invest in the market.

These results suggest a rather inconspicuous effect of the growing financial sector on politics, an effect that goes beyond the visible and widely discussed channels of influence, such as large campaign contributions, lobbying activity, or the prominence of Goldman Sachs executives in the U.S. government. By encouraging a pro‐market social and political outlook, markets may engender a self‐sustaining dynamic whereby their growing reach leads to wider support for their further expansion.

Our findings suggest a link between growing trust in financial markets and more right‐leaning socioeconomic values. A pertinent question is whether the opposite effects also hold true. Put differently, would growing distrust in financial (or other) markets lead to a leftward shift? Exploiting instances when markets were tainted by scandals (e.g., Barclays' Libor manipulation, Enron, Madoff), future research may be able to isolate the effect of trust in markets on socioeconomic preferences.

This is a first attempt at evaluating experimentally the impact of exposure to investing in the stock market on social values. The volatility of the market during the experimental treatment was higher than average because of the Brexit. While of course both treatment and control groups experienced the same external conditions, it is an open question whether lower market volatility would have produced weaker or stronger effects. Assuming that greater market uncertainty tends to decrease trust in markets, it seems reasonable to conjecture that the results we report underestimate the magnitude of the general effect. Future replications of this type of study will help shed light on this conjecture.

The interpretation and policy implications of our results depend, to some extent, on one's ideological dispositions. Some might find it troubling, for example, that engagement in financial markets decreases participants' appreciation of the need for a social safety net and for regulation of markets. Others, however, may applaud the effect of market participation on the way people think about personal responsibility for individual choices and achievements. Some may also celebrate the reduced support for market regulation. Similarly, people may disagree in how they interpret the finding that exposure to investment activity generates confidence (or, perhaps, overconfidence) in financial markets as a savings vehicle for the masses, including for people's pensions.

This latter point speaks to a growing policy trend of governments encouraging citizens to invest in the stock market via subsidies and tax breaks. The United States, for example, seeks to encourage savings by allowing tax‐deferred retirement funds for those making investments in Roth IRAs. In 2017, the Israeli government replaced some of the traditional child‐rearing assistance funds with a savings plan for every child. Rather than receiving cash, parents receive funds that they can invest in various savings vehicles, such as mutual funds. To date, these policies were assessed and debated with respect to their economic effects. Our findings suggest that such policies may also have meaningful political repercussions.