Socially Responsible Investment: The Role of Narrow Framing

Abstract

This paper investigates the impact of socially responsible investment on individuals’ risk taking behavior and portfolio rebalancing decisions. We find that concerns for social responsibility do not impact stock market participation and willingness to take risk but simply alter individuals’ preference among risky assets. Through our experiment, subjects allocate endowments among one risk-free asset and two risky assets. For one risky asset, we vary the characteristics in four conditions. Relative to the control condition, this risky asset yields additional payments for subjects themselves in one treatment, and for charities in the remaining two treatments. Our results show that additional payments for oneself encourage risk taking behavior and trigger rebalancing across different risky assets. However, payments for charities solely induce rebalancing. This finding is consistent across different interest rates and risk levels. As traditional mean-variance analysis has difficulties in explaining these observations, we propose a framework of narrow framing, whereby individuals only consider social responsibility in the account for risky investments.

Keywords: Socially Responsible Investment, Social Preference, Risk Taking Behavior, Portfolio Rebalancing, Stock Market Participation, Narrow Framing, Experimental Finance

JEL Classification: G11, D64, C9