Was This the Biggest Impact of the Occupy Wall Street Movement?

SMITH BRAIN TRUST — Could the prevalence of anti-market rhetoric — like the kind espoused by the Occupy Wall Street movement — be slowing the economic recovery? New research from the University of Maryland's Robert H. Smith School of Business says yes, it could — and by quite a lot. The research finds that the language of the anti-market movement can have a noticeable effect on people, particularly among more sophisticated investors.

"This could be, among many other dimensions, one of the reasons why there is this very slow recovery now," says Smith School finance professor Francesco D'Acunto, who wrote the report. "To get the trust of people again, it takes a lot of time after we have been bombarding them with this rhetoric about the financial system." 

The findings pose a quandary for institutions, journalists and policymakers: How can stakeholders openly assess the failings of the financial system and bring about needed change, while not stoking the kind of outsized panic that could stifle investment and deepen an economic crisis? "The solution," D'Acunto says, "is to say, 'OK, let's then solve those issues,' maybe by changing regulation or allowing for more competition in the banking system."

In what is believed to be the first research to test the impact of anti-market rhetoric on economic outcomes, D'Acunto tested how subjects would invest hypothetic assets after reading a passage about the advantages and disadvantages of investing in the stock market. Some subjects were given a passage that contained politically charged words and phrases, like those chanted during Occupy Wall Street protests and repeated throughout Bernie Sanders' primary bid for the Democratic presidential nomination, while the other subjects read a similar passage that contained neutral wording.

For example, the highly charged "Wall Street" was replaced by the more neutral "stock market." "Capitalistic economy" became "modern economy." "Private interest groups" became "private citizens," and "big corporations" was toned down to "large companies." The phrase "investment banks like Goldman Sachs" was replaced with "specialized investment banks."

"If anti-market rhetoric hinders financial risk-taking and investment, its spikes during economic crises might contribute to prolong recessions," D'Acunto says.

In his working paper, "Tear Down This Wall Street: The Effect of Anti-market Rhetoric on Financial Decisions," D'Acunto found that people who were exposed to phrases associated with anti-market rhetoric were less less likely to invest in risky opportunities framed as investments in stocks, and when they did invest, they plunked down lower amounts of money. Those people were 10 percentage points less likely to invest in opportunities whose average take-up rate is 70 percent. Given a hypothetical $100 endowment to invest, they invested just $27, compared to the $35 average invested among the control group. 

Participants who were exposed to anti-market rhetoric, invested in between 15 and 30 percent less than those who were not. "And the negative effect is larger, the riskier the opportunity," D'Acunto says. 

Surprisingly, the report found, the effect was greater among groups who are generally considered more sophisticated: women, older investors and the college-educated. 

"What surprised me most was the stark variation among types of individuals – the differences between men and women," D'Acunto says. "By far, it is women who react the most." 

Men who were primed with anti-market rhetoric didn’t show a significant change in their willingness to invest, the report found. But women did. 

"There is this notion that women care much more about social outcomes, and for society in general," D'Acunto says, of the gender gap. "And because what we are talking about here is a part of the society that is kind of ripping off the rest of the society, they might feel more concerned about this kind of action. Men are more individualistic." 

He says terms, such as "Goldman Sachs," did not resonate badly with his male subjects, while they did resonate badly with women. 

"This is sort of an open question," he says. "Why is it that women react more or care more about this anti-market rhetoric?"

More-educated subjects and older subjects also became less inclined to invest, while less-educated and younger participants showed almost no reaction to the anti-market language.

A larger effect 

D'Acunto says he was motivated to run the experiments to challenge the way experts think about anti-market protesters. 

"We always know that when there is an economic crisis, the parties who are very much against the financial system tend to get a lot of attention. And we always think of this as a cultural phenomenon," he says. "I think it’s very important to show that this by itself can create this feedback effect on the economy."

And the effects can be prolonged over an extended period of time.  

The sentiment espoused by the Occupy movement is by no means new. It predates modern capitalism, D'Acunto says, but it's generally "diffused" in capitalistic economies and peaks only during economic crises.

That timing is meaningful, D'Acunto says, because as his research shows, such sentiment can have a dampening effect on investment, thereby weigh on economic expansion and prolonging recessions.

"This isn't a paper that says 'We shouldn’t listen to Bernie Sanders, or Bernie Sanders is bad for the economy,' " D'Acunto cautions. "People who are exposed to anti-market rhetoric are not necessarily always worse off."

He cites the individual day traders, who trade too often and with outsized confidence that they can beat the financial system’s technologically superior behemoths. For them, the language of the anti-market movement can have a welcome sobering effect. "They trade less, but that might be good," D'Acunto says.

READ MORE: Tear Down This Wall Street: The Effect of Anti-Market Ideology on Investment Decisions, by Francesco D'Acunto, is a working paper available for review on the Social Science Research Network.