Toward An Economic Theory of Dysfunctional Identity∗

We advance a novel choice-theoretic model of “identity” based on the notions of categories and narratives. Identity is conceived as a matter of “reflexive perception” — how people understand themselves. Choosing an identity is equivalent to making a generalization about one’s past that highlights the most salient aspects of experience. When many individuals make a common choice in this regard, they embrace a collective identity which is dysfunctional if it is Pareto dominated by an alternative self-classificatory schema. Using a simple multi-stage risk sharing game, we explore conditions under which dysfunctional collective identities might be expected to emerge.