Altruism and egoism in investment decisions

• DOI: http://doi.org/10.1002/rfe.1053
• Author: Nadja Guenster,Daniel Brodback,David Mezger
• Published date: 01 January 2019
• Date: 01 January 2019

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wileyonlinelibrary.com/journal/rfe Rev Financ Econ. 2019;37:118–148.

© 2019 University of New Orleans

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INTRODUCTION

In this paper, we investigate the impact of personal values on the relative importance of social responsibility in investment de-

cisions. Classical asset pricing models assume that investors base their investment decision solely on risk and return (Lintner,

1965; Sharpe, 1964). More recent theoretical models suggest that values are reflected in investment decisions (Fama & French,

2007; Heinkel, Kraus, & Zechner, 2001). Recent empirical evidence analyzing holding and trading data supports these models.

The empirical evidence shows that investors incorporate religious and political values as well as social norms in their invest-

ment decisions (Hong & Kacperczyk, 2009; Hong & Kostovetsky, 2012; Kumar, Page, & Spalt, 2011; Peifer, 2010).

Over the last decades, socially responsible investing (SRI) evolved into a substantial part of the market. In 2018, roughly

$12 trillion or one-fourth of US assets under management were invested with one or more SRI mandates (US SIF, 2018). The

Forum for Sustainable and Responsible Investment (US SIF) mentions “personal values and goals” as motivation to invest

responsibly, but also notes that “Sustainable investors aim for strong financial performance [...].” In line with this anecdotal

evidence, survey and experimental studies confirm the existence of non-pecuniary and pecuniary motives. Nilsson (2008,

Received: 15 March 2018

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Revised: 5 October 2018

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Accepted: 7 October 2018

DOI: 10.1002/rfe.1053

SPECIAL ISSUE ARTICLE

Altruism and egoism in investment decisions*

Daniel Brodback1

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Nadja Guenster1

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David Mezger2

1University of Muenster, Muenster,

Germany

2KPMG, Frankfurt, Germany

Correspondence

Daniel Brodback, University of Muenster,

Muenster, Germany.

Email: daniel.brodback@wiwi.uni-muen-

ster.de

Abstract

We provide survey evidence that personal values have an impact on individual

investment decisions, in particular preferences for socially responsible investing.

Our findings show that there is a positive link between altruistic values and the rela-

tive importance of social responsibility. This effect is stronger when individuals be-

lieve that they can make a positive social or environmental impact with their

investments, or when they feel morally obliged to invest responsibly. If altruistic

individuals associate responsible investments with higher returns, it decreases their

motivation to invest responsibly. Egoistic values are negatively associated with the

decision to invest responsibly, unless individuals associate responsible investing

with higher returns.

JEL CLASSIFICATION

A13, D64, G11

KEYWORDS

investment decisions, psychological values, socially responsible investing

*We thank Ralf Barkemeyer, Alexander Bassen, Anna Snider, and Ferhat Akbas, as well as seminar participants at the Corporate Responsibility Research

Conference 2017 in Sevilla, the PRI Academic Network Conference 2017 in Berlin, the 2018 Asia Pacific Regional Conference of the Society for Experimental

Finance in Brisbane, the 17th Colloquium on Financial Markets in Cologne, the 2018 Boulder Summer Conference on Consumer Financial Decision Making,

the 2018 International Symposium in Finance in Crete, the Research in Behavioral Finance Conference 2018 in Amsterdam, and the Second Conference on

CSR, the Economy, and Financial Markets in Chicago, as well as Alok Kumar (the Editor) and two anonymous referees for helpful discussions and construc-

tive comments and suggestions. We further thank Bernabé Escobar Pérez (Organizing Committee President) for awarding this paper the best PhD student paper

award at the Corporate Responsibility Research Conference 2017 in Sevilla.

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BRODBACK etAl.

2009), Riedl and Smeets (2017), Wiesel, Myrseth, and Scholtens (2016) and Wins and Zwergel (2016) show that social pref-

erences affect the decision to invest responsibly. Døskeland and Pedersen (2016) and Glac (2009) however conclude that pe-

cuniary motives are the main determinant for the decision to invest responsibly. Statman (2008) confirms these two motives in

interviews with socially responsible investors. The interviewed investors have a general preference for doing good that mani-

fests, for example, in the contribution of time and money to good causes. However, most responsible investors expect similar

returns to conventional investments and only a few are willing to forgo returns for social responsibility.

We show that the financial and non-financial motives for investing responsibly are closely related to an individual’s psycho-

logical values, altruism and egoism (Schwartz, 1992). We base our argumentation and empirical tests on the value-belief-norm

theory (Stern, Dietz, Abel, Guagnano, & Kalof, 1999). This theory states that an altruistic individual who believes that (1)

things she values are threatened and that (2) her behavior helps in averting this threat, feels morally obliged to act. The value-be-

lief-norm theory has successfully been applied to explain proenvironmental behavior, for example the reduction of personal car

use, or household CO

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emissions (Nordlund & Garvill, 2003; Steg, Dreijerink, & Abrahamse, 2005; Stern, 2000). For egoism,

the literature applying value-belief-norm theory shows that egoistic values are negatively related to proenvironmental behavior,

such as recycling, reduction of personal car use, and household CO

2

emissions (De Groot & Steg, 2008; Nordlund & Garvill,

2002; Steg et al., 2005; Stern et al., 1999).

Based on this theory, we expect that altruistic values, beliefs about the effectiveness of socially responsible investments, and

personal norms will be positively related to the relative importance of social responsibility in investment decisions. We propose

that egoistic values will be negatively related to the relative importance of social responsibility in investment decisions, unless

investors expect higher returns.

We survey individuals at the citizen service center in Muenster, Germany. We obtain a diverse sample of 306 participants,

who rate several randomly designed mutual funds with varying attributes of risk, return, and social responsibility. Using the

participants’ ratings, we conduct a conjoint analysis (Green & Srinivasan, 1978) to estimate the relative importance of social

responsibility in investment decisions.1 We measure individuals’ values following Schwartz (1992) and focus on egoism and

altruism. We use the Schwartz (1992) value scale not only because it is part of the value-belief-norm theory but also because it

is very commonly used in research in psychology (Lindeman & Verkasalo, 2005; Parks-Leduc, Feldman, & Bardi, 2015). We

measure beliefs as the perceived social or environmental effectiveness of responsible investments. To quantify personal norms

we ask participants to which extent they feel morally obliged to invest socially responsible. We collect information about finan-

cial literacy, perception of risk and return, and demographics.

Our results show that there is a positive link between altruistic values and the relative importance of social responsibility. For

an increase in altruism from the 25th to the 75th percentile, the relative importance of social responsibility increases by 10.31

percentage points. This effect is even stronger when individuals feel morally obliged to invest responsibly and believe they can

make a positive social or environmental impact with their investments. In this case, the relative importance of social responsi-

bility increases by 14.94 percentage points for the same increase in altruism from the 25th to the 75th percentile. Interestingly,

we find that if very altruistic individuals associate responsible investments with higher returns, it decreases their motivation

to invest responsibly. For individuals at the 90th percentile of altruism, a one-unit increase in SRI return perception leads to

a 2.13 percentage points lower relative importance of social responsibility. We interpret these results in line with a body of

research that shows how extrinsic incentives can crowd out intrinsic motivations (e.g., Andreoni & Payne, 2011; Ariely, Bracha,

& Meier, 2009; Frey & Jegen, 2001; Gneezy, Meier, & Rey-Biel, 2011). These papers show in the context of (blood or other)

donations that providing financial incentives for “doing good” actually decreases individuals’ willingness to do good.

We find that egoistic values are negatively associated with the preference to invest responsibly. For an increase in egoism

from the 25th to the 75th percentile, the relative importance of social responsibility decreases by 4.9 percentage points. Egoism

leads to an increased relative importance of social responsibility only when individuals expect higher returns from holding

responsible assets. A one unit increase in return perception of socially responsible assets increases the relative importance of

social responsibility by 9.71 percentage points for an individual located at the 75th percentile of the egoism scale.

Based on the relative importance of return, social responsibility, and risk in investing elicited from the conjoint analysis, we

then cluster the participants. By investigating differences in these clusters, we provide evidence that those individuals who care

most about returns are characterized as egoists with low belief and moral obligation to engage in SRI. In our sample, they have

the highest self-reported investment knowledge and perceive SRI returns to be lowest compared to conventional investments.

Return-focused individuals are predominantly male and we present some evidence that they are rather old with high income.

Investors that focus on social responsibility have the highest scores on the altruism scale. Not only their beliefs and norms con-

cerning SRI are the highest, but they moreover have the highest perception of SRI return. However, almost 40% of individuals

in this segment attribute a high importance to social responsibility although they expect lower returns. Self-reported investment

knowledge is significantly lower compared to the return-focused segment. Investors focused on social responsibility are young