In the gloomy days of the pandemic lockdowns, I sought relief by learning more about optimism. The book Learned Optimism, by psychologist Martin Seligman, arrived in our building’s foyer nestled in a pile of packages. Optimists, I soon discovered, view bad events as temporary and good events as permanent.
I am a behavioural finance academic who previously worked at the NSW Government’s so-called ‘Nudge Unit’. All of this reading lit a spark: would it be possible to encourage more sustainable investment through the optimistic framing of information?
According to the research, optimists are more persistent, healthier, happier, and earn more on average than less optimistic people. Most interestingly and importantly, optimism can be learned.
This mutability fascinated me. In the ‘Nudge Unit’, we devised policies to create better outcomes for citizens and employers, such as a text service encouraging apprentices to seek help if they felt overwhelmed, that reduced dropout rates by 16 per cent .
Accentuate the positives when seeking green investors
There are parallels between optimism and our climate dilemma. An optimistic view sees the costs of fossil fuel transition as temporary, while the benefits to the environment are permanent. I began to think about all of the novel applications optimistic framing could have for nudging and policy.
Our decisions are influenced by the way information is presented, or ‘framed’. Different framing can lead to very different choices, even when the options are the same.
To illustrate, suppose you are considering buying a gym membership. The same information about membership cost could be presented as an annual fee of $500 dollars, or framed as costing $1.37 per day. Framing effects are particularly prevalent in financial decisions involving uncertainty.
Together with my research collaborator, Dan Daugaard, we set out to test whether message framing could influence investor decisions. Specifically, we examined whether optimistic framing could encourage ‘green’ investing, even when the financial return would incur a cost compared with non-responsible funds.
We asked more than 300 fund managers and investment professionals their preferred investment allocations, in an incentivised controlled experiment. The payments participants received depended on the returns of their allocation choice.
Frames used to motivate responsible investment
| Frame | Description |
|---|---|
| Control | The general message highlights the risks of continued investment in fossil fuels: “International financial monitoring bodies warn global warming is now a major financial risk.” |
| Social norm | Presents similar information to the control condition, except that the information is framed as a descriptive norm in financial markets: “Most investors are now realising that…”. |
| Optimism | Introduces similar information to the control condition, except that the message contrasts the temporary cost of divestment with more permanent benefits of low carbon emissions over time, “In exchange for the temporary pain is a permanent gain” as regulatory disruptions continue to grow. |
| Messenger | The message is delivered by an identifiable person, Bob Litterman, Chairman of the Board of Trustees at Commonfund, who understands “the externalities created by burning fossil fuels…and the desire to position the portfolio to be aligned with his company’s mission.” |
We tested the effect of an optimistically framed preamble that emphasised the temporary costs of transition, and permanent gains and growing value of low carbon emission assets. We also tested whether framing divestment as a social norm, or communicating it by a person with perceived credibility and expertise (a messenger) could also bolster responsible investment compared a control preamble with a neutral framing.
Only the optimistic message worked.
The optimistic message significantly increased sustainable investment compared to a control group who received neutral framing. What really surprised us was this optimistic messaging worked on seasoned investment professionals with an average of 19 years’ experience. Previously it had been widely assumed that highly analytical professional investors could not be nudged.
Institutional investors play a particularly important role in transitioning funds away from fossil fuels, because they have the most influence over investment allocations. For example, in Europe, the investment market is dominated by institutional investors who, as of 2020, account for 72% of all assets under management. Only 28% of assets were related to retail investment.
Our study shows that framing divestment decisions in a more positive way, with an emphasis on the transitory nature of costs and the permanency of future benefits, significantly increases responsible investment by 3.6%. With the total of professionally managed assets valued at USD $98.4 trillion globally, a comparable effect size would represent a USD $3.6 trillion shift in asset allocations.
The upsides of optimism
Our nudge was buoyed by the intrinsic qualities of optimists who see bad events as temporary. We wanted to align that optimism with the future of our environment. Another character trait is that optimists are ‘action-oriented’ people – depression tends to make people less responsive. So the familiar catastrophic messages about the future of the planet actually breed inaction.
The transition away from fossil fuels requires a significant global shift into sustainable investment, and institutional investors are key agents in that transition.
Instead of focusing on the consequences of global warming, climate communication could incorporate the permanency of future benefits such as flourishing ecosystems, improved longevity and health, shared economic prosperity, and greater global security. What I have learned from my research is that it’s important to be optimistic about your future, because if you’re not optimistic, you won’t invest in your future.
This article is drawn from the following co-authored journal publication:
Daugaard, D., Kent, D., Servátka, M. et al. ‘Optimistic framing increases responsible investment of investment professionals.’ Nature, Scientific Reports, 14, 583 (2024). https://doi.org/10.1038/s41598-023-50965-w
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