Behavioral perspective on sustainable finance: nudging investors toward SRI
Authors: Gupta Amisha , Goswami Shumalini 
Published: June 2024

Purpose

The study examines the impact of behavioral biases, such as herd behavior, overconfidence and reactions to ESG News, on Socially Responsible Investing (SRI) decisions in the Indian context. Additionally, it explores gender differences in SRI decisions, thereby deepening the understanding of the factors shaping SRI choices and their implications for sustainable finance and gender-inclusive investment strategies.

Design/methodology/approach

The study employs Bayesian linear regression to analyze the impact of behavioral biases on SRI decisions among Indian investors since it accommodates uncertainties and integrates prior knowledge into the analysis. Posterior distributions are determined using the Markov chain Monte Carlo technique, ensuring robust and reliable results.

Findings

The presence of behavioral biases presents challenges and opportunities in the financial sector, hindering investors’ SRI engagement but offering valuable opportunities for targeted interventions. Peer advice and hot stocks strongly predict SRI engagement, indicating external influences. Investors reacting to extreme ESG events increasingly integrate sustainability into investment decisions. Gender differences reveal a greater inclination of women towards SRI in India.

Research limitations/implications

The sample size was relatively small and restricted to a specific geographic region, which may limit the generalizability of the findings to other areas. While efforts were made to select a diverse sample, the results may represent something different than the broader population. The research focused solely on individual investors and did not consider the perspectives of institutional investors or other stakeholders in the SRI industry.

Practical implications

The study's practical implications are twofold. First, knowing how behavioral biases, such as herd behavior, overconfidence, and reactions to ESG news, affect SRI decisions can help investors and managers make better and more sustainable investment decisions. To reduce biases and encourage responsible investing, strategies might be created. In addition, the discovery of gender differences in SRI decisions, with women showing a stronger propensity, emphasizes the need for targeted marketing and communication strategies to promote more engagement in sustainable finance. These implications provide valuable insights for investors, managers, and policymakers seeking to advance sustainable investment practices.

Social implications

The study has important social implications. It offers insights into the factors influencing individuals' SRI decisions, contributing to greater awareness and responsible investment practices. The gender disparities found in the study serve as a reminder of the importance of inclusivity in sustainable finance to promote balanced and equitable participation. Addressing these disparities can empower individuals of both genders to contribute to positive social and environmental change. Overall, the study encourages responsible investing and has a beneficial social impact by working towards a more sustainable and socially conscious financial system.

Originality/value

This study addresses a significant research gap by employing Bayesian linear regression method to examine the impact of behavioral biases on SRI decisions thereby offering more meaningful results compared to conventional frequentist estimation. Furthermore, the integration of behavioral finance with sustainable finance offers novel perspectives, contributing to the understanding of investors, investment managers, and policymakers, therefore, catalyzing responsible capital allocation. The study's exploration of gender dynamics adds a new dimension to the existing research on SRI and behavioral finance.