Paola Sapienza, a professor at Northwestern University, studies how cultural beliefs and preferences are at the root of economic decision-making and economic conditions. She says, for example, that investing in the stock market is partially an act of faith, underlining how influential a person’s cultural background can be for financial participation. With her work and expertise in consumer finance, Sapienza introduces a new approach to standard economic modelling.
for ongoing facts and inspiration about the women in economics.
At a glance
Title: Donald C. Clark/HSBC Chair in Consumer Finance Professor at the Kellogg School of Management, Northwestern University
Field: Financial economics, cultural economics
A mother’s wish: Wants her children to see the world and make their own experiences in life.
A different way: Suggests that economics is an unnecessarily aggressive field, and that the narrative can be changed without impacting results.
A new way to explain economic phenomena
Paola Sapienza uses culture-based explanations to better understand economic outcomes. She points out how culture was for a long time neglected by most economists, possibly because it’s a difficult concept to define.
I think of culture as preferences and beliefs that are shared by social, ethnic, religious groups. They are transmitted, pretty much unchanged, from generation to generation.
Sapienza wanted to find out how culture influences people’s decision-making and, ultimately, their economic situation. “I think of culture as preferences and beliefs that are shared by social, ethnic, religious groups. They are transmitted, pretty much unchanged, from generation to generation,” explains Sapienza. She says that people can’t change their ethnicity, their race or their family history, and refers to these as the deep, unchanging aspects of culture.
Is culture at the root of economic decisions?
In her research, Sapienza argues that immigrants are good proof of the invariance of culture. Their preferences and beliefs are formed by their country of origin, but they may live in economic conditions that are very different from the country they’re from. If culture didn’t play a role, immigrants from different countries, or immigrants and non-immigrants that live in similar economic situations, would share the same preferences and beliefs. However, Sapienza’s work shows that this is not the case.
For example, people of Canadian origin that have lived their entire life in the U.S. still show a more positive attitude towards redistribution of wealth, compared to Americans with a similar economic background that are not of Canadian ancestry. Based on such findings, Sapienza argues that cultural characteristics and their influence on economic decision-making need to be accounted for in standard economic theory.
Get to know the women in economics
Transmission of preferences and beliefs in the family
In her more recent work, Sapienza looks closely at the long-term impact of transmission of preferences and beliefs from parents to children. “We wanted to find out whether immigrants of different origin perform differently depending on the country of origin of their parents, and we did find incredible results.”
For example, Sapienza and her co-researchers found that immigrant children from more future-focused cultures are often higher achievers in math and reading. They also tend to have fewer absences and disciplinary incidents.
“The U.S. have the bottom quartile in terms of long-term orientation. They are not very patient as a society. And so they tend to perform at the bottom compared to these immigrant kids that go to the same schools,” explains Sapienza. “In the second generation, the effect decays a little, but it’s very strong. That is a really interesting application how these preferences that are transmitted from parents to kids have an impact. We don’t know how kids internalize these preferences. Maybe partially by observing.”
What determines how much we trust others?
Trust is a key concept in many of Sapienza’s papers, which the economist links back to a person’s cultural background. She points out that there are economic decisions for which the ability to trust others matters more. For example, while trust is fundamental to all trade and investment, Sapienza finds that trust is particularly important in financial markets. In financial markets, people need to be willing to part with their money in exchange for the promise of more money later.
“If you think about the word ‘creditor,’ it comes from Latin. ‘Credere’ is ‘trust,’ and so, fundamentally, in finance, one important ingredient is the belief that you can trust other people,” explains Sapienza.
In finance, one important ingredient is the belief that you can trust other people.
How can financial participation be promoted?
Sapienza was born in the more traditional south of Italy. She and her co-authors looked at the degree of financial development across different parts of Italy. Their aim was to examine if areas with lower social capital (correlated with lower trust levels) also are financially less developed. They measured the degree of financial development by analyzing, for example, whether people were more likely to invest in cash or stock.
Their research showed that areas with lower social capital, especially in the south of Italy, were also less financially developed. Sapienza says that the effect is stronger where legal enforcement is weaker, or among the less educated. With lower education levels, people don’t necessarily understand the mechanisms of the financial market and therefore rely more on trust. Sapienza suggests that better governance, stronger legal enforcement and better regulation could be a substitute for trust and eventually increase financial participation in areas where social capital is low.
Trusting the stock market
Sapienza analyzed the effect that a lack of trust has on stock market participation. “Trust is a fundamental driver in the decision to invest in the stock market,” says the economist. “It can explain one of the big puzzles in finance: that even among the very wealthy there are a lot of people that stay altogether away from the stock market.”
Sapienza looked at Dutch and Italian micro data as well as cross-country data and found evidence that a lack of trust has an effect on the decision to invest in stock. Adding trust to standard economic investment models, according to Sapienza, would bring economists closer to an explanation of why there are so many differences in people’s ability and willingness to invest.
Trust is a fundamental driver in the decision to invest in the stock market.
Bilateral trust in Europe
Sapienza also looked at cultural biases in connection with economic exchange. She analyzed data from Eurobarometer on how much people said they trusted people from other European countries, and she found that cultural traits such as religion, history of war or genetic distance determined trust levels.
The economic consequence: Low levels of trust lead to less cross-country-trade, less portfolio investment and less foreign direct investment. “We wanted to know whether bilateral trust could explain a lot of transactions among countries. And we found indeed that it will have a substantial additional effect.”
Religion and economic outcomes
Sapienza also didn’t shy away from researching the link between religion and economic outcomes. With data from the World Values Survey — a project coordinated by the University of Michigan — she tried to find out how much of an impact religion has on people’s economic well-being. She found, for example, that Christian religions seem to be more positively associated with attitudes that are conducive to economic growth.
“Where we found religion doesn’t do very well is questions on fairness,” Sapienza says. Her paper suggests that intolerance is more present in all religious denominations, compared to people who see themselves as atheists or agnostics.
Stereotypes in the hiring process
Besides her work in cultural economics and finance, Sapienza conducted research on the stereotypes that impair women’s careers in the sciences. In one of her experiments, MBA students were asked to perform an arithmetic task. A male and a female student in the group were asked to stand up, and the other group members had to choose one of them to represent them and perform the arithmetic task. Participants were rewarded if they had picked the person that performed better. The result: Both male and female students in the group were twice as likely to choose a man rather than a woman.
“We wanted to see whether there were any particular biases in hiring and promoting women,” explains Sapienza. “When we allowed the two students to predict how well they would do in the game, the difference became even bigger and more men were selected. This is driven by one factor, which is that men tend to boast [about] their performance, and women tend to be way more modest. That’s a very well-known fact, but what’s very interesting is that they are taken at face value by the recruiter, and in that way, women are seriously penalized.”
Months later, Sapienza and her fellow researchers asked the same students who participated in the experiment to do an Implicit Association Test (IAT). They found that the biases the experiment showed correlated with the implicit biases that the IAT revealed. People who had chosen a male over a female student in the experiment also tended to associate the male gender with stronger math and science abilities.
Sapienza says that people tend to act on biases without necessarily being aware of them. She says that revealing stereotypes is key: “By doing that, I think we can move the needle.”
Men tend to boast [about] their performance. That’s a well-known fact, but what’s interesting is they are taken at face value by the recruiter.