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Human beings are naturally ethical… Or are we?

It is the age-old debate: are human beings naturally selfish or naturally altruistic? Every subject worth researching in economic sociology has that homo economicus versus homo reciprocans issue at its core. In economics, the basic idea of motivation assumes that if left unmonitored and without extrinsic benefits (like bonuses or benefits for example), one will slack off and not work to her or his maximum productive capacity. This has extended into the fundamental onus of a for-profit corporation, wherein according to Milton Friedman’s 1970 New York Times Manifesto, the social responsibility of business is to increase its profits. This is important to understand when we attempt to redefine the purpose of business, investment, and financial markets. That is, we want to reconstruct Finance for good, expose the ills and unethical practices of the industry… but are we as human beings, even naturally good?

Behavioralists and business ethics scholars have argued that not every decision is selfishly made, even though human beings are, in fact, rational. Herbert Simon in 1955 coined the term bounded rationality. He said that we have cognitive limitations in making decisions that differ from person to person. Daniel Kahneman and Amos Tversky expanded this idea in the late 1970s and early ‘80s when they embarked on a series of gambling studies to illustrate how the sense of winning or losing influences how one makes bets outside what should have been a calculated rational decision. Their main contribution was the idea of framing: our backgrounds frame our ways of thinking; the specific situation that we are in frames our decisions. It is not all black and white.

Other more recent studies have illustrated the fact that individuals may willingly choose immaterial utility such as happiness or satisfaction gained from ethical considerations within their utility maximization, basically challenging the value maximization principle in saying that the traditional economic measurement of utility has been incomplete. Some experiments involving retail investors have shown that investors do care about social, environmental, and ethical issues apart from financial return when they invest. Others have illustrated that holding profit constant, people are willing to pay more for ethical shares or accept lower financial returns for their investments in exchange for positive social returns. Such studies have highlighted that the strength of investors’ personal values is important in determining their investment choices.*

Indeed, there is also some practitioner evidence that during financial crises, responsible companies, or those with good ethical and sustainable practices, as well as the funds that invest in such companies — not necessarily performed better per se, but at least were “stickier” or less volatile than their traditional counterparts. According to the Social Investment Forum, the first nine months of the 2001 US downturn saw a 94% drop in the dollars investors put into all mutual funds, compared to just a 54% drop for socially screened funds. Similarly, from the start of 2007 to the opening of 2010, a three-year period when broad market indices such as the S&P 500 declined and the broader universe of professionally managed assets increased less than 1%. Responsible investment assets in the US increased by more than 13%. Some early work in Responsible Funds during COVID-19 illustrate the same trend. Because of this strengthening trend, such investments have attracted more and more investors even though they do not necessarily return a higher profit. Some scholars have called this the “insurance case” for sustainability.

And so here is what we know: in normal situations, human beings somewhat care about ethical practices of firms, depending on the ways in which they were framed, and in crisis situations, even more so because it is the best form of insurance, i.e., ethical attributes produce high levels of stability.

This “even more so” fact, however, does bring to light the idea that people care about predictability and favor “less risky” investment plays — which still reverts to investors being rational after all. But at least, such rationality is guided by an intrinsic appreciation or value attached to companies that happen to do better than everyone else during periods of instability because they had done good in the past.

But apart from risk reduction, are investors motivated beyond profit? The answer is “yes.” But it is not all tree-hugging and pure altruism. Instead, the complexities of human decision-making allow us to navigate between both worlds of being self-interested, and — as social beings, being cognizant that this self-interest necessarily involves a concern for the well-being of others as well as our natural environments. It is in our self-interest to be picky and have long-term thinking in our investments, and to our demise when we make decisions that are beneficial only in the superficial and short-term.

*A list of references of such studies is available from the author upon request.


Daniela “Danie” Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IESEG School of Management in Paris and maintains teaching affiliations at IESEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.

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