Another Payoff From Trading Stocks: Reducing Political Polarization
An experiment shows that investing — even when unprofitable — can be a lesson in building trust.
When people from different backgrounds buy into the same market, they may see that everyone is connected. | iStock/DrAfter123/Cory Hall
For some economists, the answer to world peace is simple: Promote more trade. In the 18th century, French philosopher Charles Montesquieu described commerce as “a cure for the most destructive prejudices.” Buyers and sellers may both profit, the argument goes, but in order to do so, each party must trust that the other will honor their side of the deal. The more they trust each other, the better the trade, and the less likely the two sides will get into a conflict that might violently disrupt this mutually beneficial relationship.
Saumitra Jha, a professor of political economy at Stanford Graduate School of Business, and Chagai Weiss, a postdoctoral fellow at Stanford’s Conflict and Polarization Lab, wondered if this dynamic could also work in the other direction: If trust deepens trade, could trade deepen trust? “Even though it’s clear that the markets really depend on trust to work, at the same time, it’s unclear whether participating in the markets might lead people to trust one another,” Jha says.
In a series of recent papers, Jha, Weiss, and Moses Shayo, a professor of economics at Hebrew University and King’s College London, find that the trust-trade relationship can work both ways. By encouraging Israelis to hold and trade stock in a range of Israeli and Palestinian companies, the researchers created an environment where people could learn about financial markets, recognize how intertwined Israeli and Palestinian business interests are, and even increase their support for the Israeli-Palestinian peace process.
“This is not a silver bullet,” says Jha, who specializes in finding ways to use financial tools to reduce political polarization. But it does give him hope that there are solutions for seemingly intractable situations like the conflict between Israelis and Palestinians. “We’re very excited about this largely because it seems like it’s having meaningful effects even in environments where you might not expect to see anything,” he says.
Jha argues that financial markets can be an opportunity to bring ideological rivals together because these markets rely on trust. “Financial markets are really a promise in some sense,” he says. “It’s about sharing the future and credibly believing that you’re going to have a share in this company, that this piece of paper is worth something, or this government is going to pay off its bond.” When people from different backgrounds agree on a common set of metrics and buy into the same market, it allows them to see that everyone is connected and that their trust in the market is reciprocated and reinforced by others.
To test their theory, Jha, Weiss, and Shayo used a randomized control trial in Israel, a highly polarized country where people have low levels of trust. Right before the 2015 national elections, the team recruited over 1,300 participants, whose attitudes they gauged with questions like, “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?” Just under 24% said they believed most people can be trusted, a relatively low level of generalized trust compared to rates in nations like Norway and Finland (over 75%) and even the U.S. (around 50%).
The researchers split the participants into two groups. Only the “treated” group was encouraged to invest in businesses listed on the Israeli and Palestinian stock markets. This group also learned about their investments and was quizzed to assess their understanding of what they were investing in. To incentivize active engagement with their portfolios, this group was given the opportunity to trade up to 10% of their assets every week. “This is not just an experience of daily trading,” Weiss says. “The study was designed to make sure that the investing experience itself is guided and informed.” Some participants traded for four weeks; others continued for seven weeks.
At the end of each session, the researchers surveyed the participants again. The results showed immense promise. Not only did the intervention make people more supportive of the peace process, it also made them more financially literate. A year later, when the researchers followed up, they found that those changes in attitude persisted. People who wouldn’t normally participate in financial markets — particularly women — became more confident and willing to invest. Investors in the stock treatment were roughly 10% more likely than their counterparts in the control group to report that “most people can be trusted” in the final survey.
In terms of trust, the results were “significant,” Jha says. They also held true regardless of whether or not someone made money from their investments. “We thought that the treatment would be stronger for those who had better performance because people tend to get more engaged when things are going up,” he says. “But the fact that it also has an effect for those whose investments did not perform well, rather than solely the successful investors, is one thing that we’re very excited about.” It was also exciting for the researchers to see that the stock treatment was particularly strong in engendering trust among those who initially were the most politically polarized.
One reason the researchers think this experiment was successful is that it wasn’t just random gambling or day trading. “They [the treated group] were thinking about the economic factors which drove the value of the asset,” Weiss says. “I think that brings you to think about the broader economy and the meaning of what it means to hold a share.” The investors learned about financial markets and, in doing so, saw how they’re part of a system that others are participating in as well.
Another key aspect of the study is that it was self-guided. “We’re not really telling people who are less educated and also less exposed to financial markets, ‘You should trust other people because they’re great,’” Weiss says. “We’re allowing them to have a new empowering experience that leads them to draw their own inference.” Jha says this experiment showed that investment can be a kind of self-guided lesson in building trust. “This kind of experiential learning can really allow people to reach new conclusions about others,” he says.
The results have encouraged the research team to scale up their approach to see if educating people through investing can be a tool to help reduce other kinds of polarization, like arguments over climate change in the United States. At a time when so many basic facts are up for debate, Jha thinks it’s especially important to find ways to bolster our trust in others. “Misinformation really feeds on the distrust that folks have of people on the other side,” he says. “So if we’re willing to give people the benefit of the doubt, then I think we can also master some of these issues.”
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