Recent studies have highlighted two apparent `contradictions' in the behaviour of ethical investors: it is not unusual for people to waive the interest on their ethical investments but say they would invest more if the interest rate was raised and it is common for people to invest both in ethical and standard funds. Lewis and Mackenzie have proposed that these contradictions can be resolved using the ideas of framing and mental accounts. The current paper uses an experimental approach to explore these issues. Participants took part in a role-play of a consultation with a `virtual' financial advisor. This was setup on the World Wide Web. Participants used the Netscape browser to provide financial and other information to the financial advisor. They were then presented with a variety of investment choices. The study revealed that ethical investors were generally committed to ethical investment, and kept such investments even if they performed badly or were ethically ineffective.
There has been a marked growth in the literature recently claiming that there is more to economics than simple optimality; as Etzioni (1988) put it “economics has a moral dimension”. This does not mean that economic decisions are irrational, merely that decision-makers may take into account what is `right' as well as what is most profitable. An interest in the role of `morality' or `ethics' in economic behaviour can be seen in studies of the importance of fairness and reciprocity in economic behaviour (Fehr and Gachter, 1998 and Fehr and Schmidt, 1999), of ethical values (Burlando, 2000) of business ethics (Wärneryd & Westlund, 1992) and in `popular' models of financial markets (Winnett & Lewis, 2000).
Studies of ethical investment have been concerned with whether it is actually ethical, whether the performance of ethical trusts has a specific ethical component or whether it can be accounted for by the size or type of firms concerned and, of most importance to economic psychologists, whether ethical investors are different from others, and prepared to incur some costs in order to invest ethically (Domini and Kinder, 1984, Anand and Cownton, 1993 and Lewis et al., 1998).
Initial studies in the UK by Lewis and his colleagues (e.g., Lewis and Cullis, 1990, Cullis et al., 1992 and Lewis and Webley, 1994) appear to show that moral commitment is highly price-elastic: sympathetic investors are prepared to choose ethical funds as part of a mixed portfolio as long as they are performing reasonably but enthusiasm for investing ethically drops if the financial return is poor. Likewise trust managers are keen to develop ethical funds (as `ethicality' is a marketable characteristic) but want their ethical funds to perform well – the message they want to get across to the investor is that they have their cake and eat it, they can express their moral concerns yet still make money. A study by Mackenzie and Lewis (1999), however, puts an interesting gloss on this picture. They carried out detailed interviews with 10 investors in shared interest (SI), a co-operative lending society which lends the majority of its money to small projects in the Third World and which pays its members an interest rate of only 2%. These interviews revealed two apparent anomalies. First, it is not unusual for members of SI to waive their right to receive interest but nonetheless claim that they would invest more in SI if the interest rate were higher. Second, it was common for investors to have holdings both in `ethical' funds and in holdings that they themselves regarded as `unethical'. Mackenzie and Lewis' interpretation of these anomalies draws on the ideas of framing and mental accounts: essentially they argue that the money invested in SI is seen by the investors as `spare cash' which can be used differently to core funds.
To take these ideas further, we argue that we need to use experimental approaches as well as surveys and qualitative interviews, as these approaches have complementary strengths (Webley et al., 1991 and Lewis et al., 1998). Investment has, of course, been invested experimentally in the past: good examples are Andreasson (1987) use of a simulated market to explore, among other things, the use of the “representativeness heuristic” to estimate the future price of a stock and DiFonzo and Bordia (1997) investigation of how rumours affect trading decisions despite investors' denigration of them. This kind of approach has also been applied to ethical investment. Webley (1992) and Lewis and Webley (1994) report a study where students role-played (on a computer) managing a portfolio of investments, including ethical investments, over a 1 1/2 year period. However, the problem with this kind of approach is that these are all simulations or role-plays of trading on the stock market. It is clear that most individual investors in shares and trusts do not actively trade: Wärneryd (2000) for example, reports that approximately 40% of Swedish and Dutch private investors make no transactions at all during a year. Rather they take a single investment decision (after having, for example, inherited some money) and then maintain their portfolio unchanged for fairly long periods. This suggests that a quite different type of simulation or role-play is required to investigate the behaviour of private ethical investors.
This paper reports on one such role-play, where the situation being simulated is a consultation with a financial advisor. The purpose of the study is partly methodological (the aim being to devise a suitable shell which can then be used to explore a variety of issues) but mainly to explore further the issue of what differentiates ethi
