Categorical Cognition and Outcome Efficiency in Impact Investing Decisions

33 Pages Posted: 21 Aug 2018 Last revised: 7 Aug 2019

See all articles by Matthew Lee

Matthew Lee

New York University (NYU) - Leonard N. Stern School of Business

Arzi Adbi

INSEAD

Jasjit Singh

INSEAD

Date Written: August 06, 2019

Abstract

The emerging practice of “impact investing” optimizes both financial and social outcomes, and thus promises to support hybrid organizations that simultaneously pursue financial and social goals. We argue, however, that impact investing decisions may be prone to behavioral factors that limit their outcome efficiency. In a portfolio allocation task designed to reflect the essential features of an impact investing decision, we find across a range of scenarios that individuals systematically fail to choose investment portfolios that achieve financial and social outcomes efficiently and thereby waste opportunities for value creation. We further show in online and in-person experiments that outcome inefficiency is related to “categorical cognition”: suppression of categorical labels on investment options increases efficiency.

Keywords: Impact Investing, Hybrid Organizations, Social Enterprise, Behavioral Economics, Categorical Cognition

Suggested Citation

Lee, Matthew and Adbi, Arzi and Singh, Jasjit, Categorical Cognition and Outcome Efficiency in Impact Investing Decisions (August 06, 2019). INSEAD Working Paper No. 2019/34/STR. Available at SSRN: https://ssrn.com/abstract=3236194 or http://dx.doi.org/10.2139/ssrn.3236194

Matthew Lee (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

Arzi Adbi

INSEAD ( email )

Singapore

HOME PAGE: http://www.insead.edu

Jasjit Singh

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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