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The Choice Architecture of Sustainable and Responsible Investment: Nudging Investors Toward Ethical Decision-Making

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Abstract

This paper applies insights from behavioral economics and nudge theory to foster sustainable and responsible investment (SRI). SRI provides an opportunity to express and promote ethical values via choice of financial instruments. While policy-makers have tried to encourage greater participation in SRI, the majority of retail investors retain a conventional approach to investment. I develop a conceptual framework to improve the effectiveness of SRI policy-making. The first part of the framework comprises a transmission mechanism which emphasizes the role of SRI as a driver for sustainable development. The second part is a model of the individual decision for or against SRI. The framework suggests that low SRI demand is a case of behavioral market failure, and that nudging is a suitable tool for dismantling behavioral barriers to SRI. A specific example of smart choice architecture is used to illustrate the framework’s potential in the design of an SRI nudge. Assuming the nudge stands up to the rigors of empirical testing, it may well provide a feasible alternative for policy-makers.

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Abbreviations

CSR:

Corporate social responsibility

ESG:

Environmental, social, and governance

KID:

Key information document

MAUT:

Multiple attribute utility theory

SRI:

Sustainable and responsible investment

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  1. Department of Banking and Finance, University of Graz, Universitätsstraße 15/F2, 8010, Graz, Austria

    Herwig Pilaj

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  1. Herwig Pilaj
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Correspondence to Herwig Pilaj.

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Pilaj, H. The Choice Architecture of Sustainable and Responsible Investment: Nudging Investors Toward Ethical Decision-Making. J Bus Ethics 140, 743–753 (2017). https://doi.org/10.1007/s10551-015-2877-9

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