A chooses its investments on environmental or social grounds alongside the financial ones. The comfortable assumption is that the people holding it simply expect to do just as well. Researchers linked real account records to survey answers and to choices in experiments where money was genuinely at stake. What did they find?
Curiosity counts. Here is the answer.
Lower, and they paid more for the privilege. On average the socially responsible investors in this sample expected less than from a conventional fund, and paid higher management fees. That is exactly why the financial explanation came out the weakest of the three tested. What carried the decision was social preferences together with social signaling.
They expected less and paid more. On average these investors forecast lower returns on the responsible funds than on conventional ones, while paying higher at the same time. Two motives carried the decision: , meaning values held for their own sake, and . Financial motives came a distant third.
The honest way to ask why somebody invests responsibly is not to ask them. Stated values are cheap, so the researchers linked what people said to what they actually held, and to what they did in experiments where a choice cost real money.
The expectations came out the wrong way around for the financial story. On average these investors thought the responsible funds would return less than conventional ones, and they were paying higher management fees while thinking it.
What explained the holdings instead were social preferences and social signaling. The first shows up where a person gives up money in private, and the second where the choice is visible to others, and both were present rather than one standing in for the other.
Two limits are worth keeping. This is one institution in one market, so the size of the effect need not travel. And an expectation is not a result: the study measured what investors believed about future returns, which settles nothing about which funds actually performed better.
wat. Some investors took a small, known financial cost so that their savings would match their values.
wat wat
Choosing an investment is not always an attempt to maximize a return, and people may use money to express who they are as well as to grow it.
How do we know?
Riedl and Smeets matched administrative records of what people actually held against their survey responses and their behavior in incentivized experiments, where a choice cost or earned real money.
What is still unknown
The sample comes from one institution and one market, and an expectation of lower returns says nothing about how the funds went on to perform.
Learn something?
Where to next
Does an exchange-traded fund make the market more accurate or more volatile?markets
Why do fund managers choose well what to buy, and badly what to sell?markets
Why do investors prefer a company they know, even when it concentrates the risk?markets