Investing: Nice People Turn Nasty

The idea that investing turns nice people into psychopaths is based on the notion that corporations encourage people to act in their own self-interest and disregard the well-being of others. While it is commonly believed that shareholders only care about their wealth, evidence suggests that this is not always the case. This raises questions about the impact of corporate culture on individual behaviour and the potential consequences for society.

The 'homo economicus' theory and its flaws

The homo economicus theory, or the "economic man" theory, is a characterisation of humans as rational agents who pursue wealth for their own self-interest. It assumes that humans have infinite capacity to make rational decisions and that they will always act in a way that maximises utility as consumers and profit as producers.

The theory originated in the 19th century with John Stuart Mill's essay "On the Definition of Political Economy and on the Method of Investigation Proper to It". Mill's subject was a "being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end". However, the idea that humans act in their own economic self-interest can also be attributed to economists and philosophers such as Adam Smith and David Ricardo.

The homo economicus theory has several flaws. Firstly, it assumes that humans are rational decision-makers, when in reality, humans are flawed and often make irrational decisions. Behavioural economists have demonstrated that humans are not rational in their decision-making and that anticipating irrational behaviour is more useful for economic modelling.

Secondly, the homo economicus theory assumes that humans have unlimited cognitive capacity and perfect information, which is not realistic. Humans are influenced by personal biases, cognitive limitations, and a lack of relevant information when making decisions.

Thirdly, the theory assumes that humans are purely self-interested, when in fact, humans often make decisions that involve some degree of altruism or ethical consideration. Most people are "prosocial" to some extent and are willing to make personal sacrifices to follow ethical rules and avoid harming others.

Finally, the homo economicus theory does not take into account social influences on decision-making. Economic sociologists argue that homo economicus ignores the role of society in shaping tastes and preferences, which is a major distinction from the homo sociologicus model, where tastes are determined by the societal environment.

In conclusion, while the homo economicus theory has been influential in economic thought, it has several limitations and does not accurately represent human decision-making.

The concept of the 'prosocial' shareholder

The concept of the prosocial shareholder is a challenge to the dominant business paradigm of "maximizing shareholder value". It is based on the understanding that the homo economicus model of purely selfish behaviour is flawed and that most people exhibit prosocial behaviour to varying degrees. Prosocial behaviour is any action intended to benefit others, such as helping, sharing, donating, cooperating, and volunteering. It is motivated by empathy, concern for the welfare and rights of others, and altruism.

The idea of the prosocial shareholder acknowledges that shareholders may be willing to accept slightly lower dividends if it meant preventing harmful incidents or disasters. This is supported by the increasing popularity of socially responsible investment funds (SRI funds), which invest in companies that promote consumer protection, human rights, and environmental sustainability. By 2010, 12% of all professionally-managed assets were managed by SRI funds. Additionally, shareholders often file proxy proposals requesting their companies to act more responsibly, demonstrating a desire to balance financial gains with ethical considerations.

However, the nature of modern stock markets and the "maximize shareholder value" rhetoric can discourage prosocial investing. Shareholders, focused solely on stock price, may pressure managers to adopt strategies detrimental to third parties. Additionally, prosocial investors face a collective action problem, where their individual decisions to invest in SRI funds may have little impact on the corporate sector's behaviour.

Despite these challenges, the concept of the prosocial shareholder highlights that shareholder value maximization need not be at odds with ethical behaviour. It suggests that corporations can serve the interests of shareholders while also considering the well-being of executives, employees, customers, and the community.

The role of corporations in encouraging anti-social behaviour

The conventional wisdom in business circles is that corporate directors should "maximize shareholder value". This has led to the dogma that corporations exist solely to serve the interests of their shareholders and not those of their executives, employees, customers, or the wider community. This assumption of shareholder primacy, however, is based on the homo economicus model of purely selfish behaviour, which many now accept does not always apply.

The problem with the homo economicus theory is that a person who acts in a purely rational and selfish manner can be considered a functional psychopath. If an individual cares nothing for ethics or the welfare of others, they may lie, cheat, steal, or even murder, as long as it serves their material interests.

In reality, the vast majority of human beings are to some degree "prosocial". Prosociality is so endemic that cheating, corruption, and murder make the news because they are relatively rare. Most people are, in the right circumstances, willing to make modest personal sacrifices to follow ethical rules and avoid harming others.

However, the structure of modern stock markets, combined with the rhetoric of shareholder value, creates obstacles to prosocial investing behaviour. Shareholders are often uninvolved in the day-to-day operations of a company and are therefore in no position to police or even know about antisocial corporate behaviour. Furthermore, because the only thing they see is stock price, they may even pressure managers to adopt strategies that make corporate injury to third parties more likely.

The ideology of shareholder value can drive corporate managers to make business decisions that go against the true interests of prosocial shareholders. Some shareholders may indeed be purely self-interested actors, or psychopaths, who don't mind if their companies deceive consumers, harm employees, or damage the environment. But the evidence indicates that most shareholders would prefer to tolerate at least somewhat diminished returns to avoid such negative outcomes.

The government has a critical role to play in encouraging corporate social responsibility (CSR). CSR refers to companies taking into account the social and environmental consequences of their actions, not just financial consequences. While CSR is voluntary and there is no mandatory legislation, the government can play a vital role in promoting and developing CSR agendas to ensure effective well-being for all through collaboration.

The government can ensure that corporations work according to the rules and norms of each nation or society. They can legislate, foster, partner with businesses, and endorse good practices to facilitate CSR development. For example, the UK government has created a minister of state responsible for CSR, and the European Commission acknowledges that CSR enterprises are deciding to go beyond minimum legal requirements to address societal needs.

In conclusion, while corporations may encourage antisocial behaviour by prioritising shareholder value, this is not inevitable. Governments can play a critical role in promoting corporate social responsibility and ensuring that businesses act in the interests of all stakeholders, not just shareholders.

The impact of investing on an individual's conscience

It is often said that corporations encourage people to think and act more anti-socially. The idea that corporate directors should "maximise shareholder value" is a common one, and it is generally accepted that shareholders only care about their own wealth. This is known as the homo economicus model of purely selfish behaviour. However, this theory assumes that people are rational and purely selfish, which is not always the case.

In reality, most people are to some degree "prosocial", meaning that they are willing to make personal sacrifices to follow ethical rules and avoid harming others. This is demonstrated by the fact that people are more likely to choose a "cooperation" strategy over a "defection" strategy in experiments, even if it means slightly lower personal payoffs. This prosociality declines as the personal cost of acting prosocially rises.

Despite this, the structure of modern stock markets and the rhetoric of shareholder value can discourage prosocial investing. Shareholders often have little knowledge of a company's day-to-day operations and are therefore unable to police against antisocial corporate behaviour. Additionally, prosocial investors face a collective action problem, where their individual decisions to invest in socially responsible funds have little impact on the behaviour of the corporate sector as a whole.

As a result, even prosocial people may act as if they are psychopaths when making investing decisions, prioritising financial gains over ethical concerns. This can have negative consequences, such as encouraging corporate managers to make decisions that maximise shareholder wealth at the expense of other stakeholders, society, or the environment.

However, it is important to note that not all shareholders are purely self-interested actors. There is a growing trend towards socially responsible investment funds (SRI funds), which invest in companies that support consumer protection, human rights, and environmental sustainability. While these funds may slightly underperform other funds, they are attracting money at a faster rate than the institutional investing industry. This suggests that many investors are willing to prioritise their values over purely financial gains.

The influence of external social cues on investment decisions

The concept of prosocial behaviour is fundamental to understanding how external social cues influence investment decisions. Prosocial behaviour refers to actions that benefit others, including altruism, ethical conduct, and even the punitive response to antisocial behaviour. While the homo economicus model assumes that individuals are purely rational and selfish, empirical evidence suggests otherwise. In reality, the vast majority of people exhibit prosocial tendencies and are willing to make personal sacrifices to uphold ethical standards and avoid harming others.

However, the structure of modern stock markets and the prevalent "maximize shareholder value" dogma can suppress prosocial investing. This is where external social cues come into play. The "Jekyll-Hyde Syndrome" describes how individuals' prosocial impulses are heavily influenced by their social context. In certain situations, such as attending a wedding reception, people may act more altruistically, while in others, like buying a used car, they may behave selfishly.

Researchers have identified three key factors that promote prosocial behaviour in experimental settings:

• Explicitly encouraging participants to act prosocially;
• Leading participants to believe that others will also behave prosocially;
• Structuring experiments so that prosocial decisions yield greater benefits for others.

Conversely, people tend to act more selfishly when instructed to do so, when they believe others are acting selfishly, and when they perceive selfishness as having minimal negative consequences for others.

The "maximize shareholder value" rhetoric in the investment world aligns with these conditions for encouraging selfish behaviour. Shareholder-value dogma promotes the idea that shareholders should pressure managers to increase share prices by any means necessary, without regard for the impact on stakeholders, society, or the environment. This rhetoric also signals to investors that their peers are likely to act selfishly, and it justifies selfish investing decisions as beneficial for "corporate governance."

As a result, even prosocial individuals may make investment choices that prioritise financial returns over ethical considerations. This dynamic helps explain why some investors contribute to charities like the Sierra Club and World Wildlife Fund while simultaneously holding shares in environmentally destructive companies. The external social cues inherent in the investment industry effectively shape investors' behaviour, often overriding their intrinsic prosocial tendencies.

In conclusion, external social cues play a significant role in influencing investment decisions. While most people exhibit prosocial behaviour in their daily lives, the unique social context of investing can bring out their "inner Mr. Hydes." To promote more ethical investing, it is essential to address the structural and ideological factors that discourage prosocial behaviour in this domain.

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