Inertia and Discounting in the Selection of Socially Responsible Investments: An Experimental Investigation

Abstract

Socially responsible investment funds (SRIs) have grown dramatically as an investment alternative in most of the developed world. This is an important development from a managerial perspective since the criteria used to qualify for inclusion in these funds could influence the decisions and behaviors of managers with regards to their CSR practices. However, little is known about how investors select SRI funds and how they allocate their investments in these funds. This study uses a structured experimental approach to determine if the decision-making process of investors to invest in SRIs is consistent with the decision-making used for conventional investments. Our theoretical framework draws on two widely studied concepts in the decision-making and investment literature, namely, inertia and discounting. For our 704 respondents we find that inertia plays a significant role in the selection of SRI funds and that they systemically discount the value of SRIs. Furthermore, the level of discounting of SRIs was positively related to the risk level of the investments. Our results suggest that SRIs need to be designed to cater to the risk/return profiles of investors and that these investors need to be better informed about the performance of SRIs versus conventional investments in order to reduce their systematic discounting.

Keywords: Socially Responsible Investment, Pensions, Choice Modelling

JEL Classification: C25, D10, M20, G11, G23