> A major problem with #1 is it becomes self-perpetuating and reinforcing: if everyone is going to be biased against you, you're going to do worse, and hence the models are validated/more models are created with these assumptions. Everyone using #1 may improve their own expected value at the expense of a worse outcome for society as a whole.

Do you have any proof of that? The world is improving on all levels, even the income gap between blacks and whites has been narrowing [1].

We're not talking about 100% segregated populations like during slavery or patriarchy, the means between the groups are very close and there's a huge overlap between the distributions. It's obvious that the vast majority of outcome isn't determined by race (otherwise you couldn't have white homeless addicts and black presidents) or any such "group" characteristic but instead by "individual" characteristics (skill, intelligence, drive, effort, hereditary wealth, chance, ...), so the evidence for this "self-perpetuating" unfairness is very weak.

[1] https://www.pewsocialtrends.org/2018/07/12/income-inequality... but you'll have to manually calculate the percentages