Investing with both our heads and our hearts
Do we listen to our heads or our hearts when investing? In an extensive field experiment involving 140,000 bank customers, two NHH researchers have investigated what motivates customers to invest in green funds.
Socially responsible investments (SRI) have become a trend in the financial markets. They are characterised by the integration of financial and non-financial motives. What motivates investors to buy SRI funds?
'The purpose of our study was to investigate whether it is financial or non-financial information that is most important when individual investors make decisions about socially responsible investments,' explains Lars Jacob Tynnes Pedersen, post-doctor at the Norwegian School of Economics (NHH).
Previous studies have been based on questionnaire surveys and lab experiments, but studies of this kind are known to have shortcomings.
In the article that Pedersen and Trond Døskeland, his research colleague at NHH, are working on, they therefore investigate the question in a field experiment on investors in an online banking context.
'In our study, investors who received financial information were significantly more willing to seek out more information and to buy SRI mutual funds. The study contributes to the literature by providing insight into pro-social decision-making in the financial markets. Investment activity can appeal both to investors' heads and to their hearts.'
Skandiabanken has introduced a system of ethical labelling of funds, which makes it possible to see which funds the bank believes have a positive ethical profile and which funds invest in companies the bank considers ethically unacceptable or dubious.
Seventy thousand in each group
Pedersen and Døskeland came into contact with the bank when it was developing an ethics-based system of red and green funds.
'We realised right away that this was a unique opportunity to conduct a field experiment. It was the first time the customers were exposed to this product,' Pedersen says.
In cooperation with the two NHH researchers, the bank distributed an electronic newsletter to as many as 140,000 customers.
Unaware that two researchers had helped to formulate the letter, one group of 70,000 customers received a letter containing financial information about the green funds, for example the tax advantages relating to investments in socially responsible funds.
The other group was informed about the ethical aspect and how green investments contribute to making the world a fairer place.
Thirteen thousand active
Around 13,000 in each group clicked the link to the newsletter and went on to invest in green funds. The question the researchers were looking for an answer to was what motivates socially responsible investments.
'What we see is that financial information is more effective than information about social and environmental factors. Both types of information result in a relatively high proportion buying green funds, but appealing to people's financial motivation is more effective,' Pedersen elaborates.
Previous studies have shown that people are more motivated to invest in green funds if they are given relevant economic information. Some of these studies are in part lab experiments or experimental surveys in which the respondents were students.
This study stands out from many others, Pedersen believes, primarily because it is possible to observe what real actors do with their own money.
'When we use our own savings, we are less willing to take risk.
Traditionally, we have thought that it is exclusively knowledge about the economic aspects of funds that motivates customers to invest in them, but our study shows that it is a mix of economic, social and environmental considerations.
'It is easy to misconstrue the results. We did not find that investors only care about money and are exclusively motivated by what they can earn on their investments.' That is definitely not the case. It is an equation in which we see that financial information weighs heaviest.'
The researcher at NHH's Department of Accounting, Auditing and Law therefore believes that, while it may be expedient to highlight both aspects of the product, the financial information should be emphasised most.
But do investments in green funds entail greater risk?
'That is a matter for debate. Green funds do not involve greater risk, but more uncertainty. If you exclude funds that invest in, for example, weapons production, tobacco and pornography, you are left with a much smaller investment universe. Finance people believe that this increases the risk because you have fewer funds to choose from and the probability of spreading the risk is lower. Others argue that you remove potential risk by excluding, for example, weapons manufacturers as investment objects. The green funds have less risk of experiencing reputation crises.'
'This is very much a matter for debate, however, and there is no consensus on either view,' Pedersen says. 'The point is that more financial information is needed precisely because there is greater uncertainty attached to green funds.'
So, this uncertainty means that you have to listen to your head and not your heart?
'No matter how much you might want to contribute to a better world, you will worry about what such investments entail. In uncertain situations, customers will seek certainty, as Gerd Gigerenzer says. The more uncertain the situation, the more typical it is for people to look to others or to other sources of information so that they can feel certain about their choice. This is very much a situation of that kind. A lot of money and a new type of investment project is involved,' Pedersen concludes.