23 Nov 2023

Lecture by Prof Rob Bauer

Thursday, November 23, 10am

Abstract: Socially Responsible Investment (SRI) has gained increasing attention and attracted trillions of dollars in asset under management in recent years. The mainstream explanation for investor’s preference for sustainable assets is social preference, or the pure selfless contribution to the general welfare, and it has been documented that investors are willing to even sacrifice some financial gains to pursue higher sustainability. Although expectations towards risk and return in such investments are crucial, they have not been formally investigated in this literature. To bridge this gap, we created a novel belief elicitation method, which is robust to respondents’ differential risk or ambiguity attitudes, as well as to nonlinear probability weighting. And the belief elicitation task is concealed in a series of binary lottery choices. We validated this method with student participants in the lab and conducted a field experiment with clients of an index fund in The Netherlands. We compare our novel incentivised belief elicitation method, another incentivised method (choice matching), with the unincentivized Likert scale that is typically used in this literature. We find that the two incentivised methods generate consistent responses that are in the opposite direction compared to the unincentivized elicitation. In particular, we find that participants systematically expect that sustainable funds will generate higher return with lower risk. Moreover, this belief is also significantly and positively correlated with their investment in a sustainable product relative to a conventional product in an incentivised asset allocation task. These results suggest that investors typically associate better financial performance with more sustainable assets, and we should assess these expectations with caution.

Download his presentation slides on “The Role of Beliefs in Eliciting Sustainability Preferences”.