Creating a clear value proposition for impact investors may be less about finding the right mix of financial and social returns than it is about choosing which of the two you're really going to be about.
Economic Theory and Irrational Behaviour
Basic economic theory assumes that more money equals more motivation, but this has been turned on its head by experimental behavioral economics as well as new brain science. We now understand that behavior and motivation are far more complex animals and that rationality is more myth than foundational principal. Daniel Pink’s book “Drive: The Surprising Truth About What Motivates Us” provides a number of examples how motivation and performance can actually decline as monetary incentives increase. Some of this can be explained by the structure of rewards that create perverse incentives that make CEOs and others more myopic and risk hungry. But what about motivations and performance related to social good? For example, most people I know working in international development are aware they’ve left something material on the table in their job search – they’ve taken jobs not because they offered the greatest pay and benefits, but because they offered the chance to make the most impact on the world. It is similar with impact investors – they mindfully make financial returns subordinate to social impact returns. Surly, thickening the layer of monetary incentives atop these largely altruistic motivations would only strengthen them, right? Not necessarily.
Consider the example of Switzerland’s nuclear waste retold in the Brafman brothers’ book “Sway: The Irresistible Pull of Irrational Behavior“.* In 1993 the Swiss government identified two small towns as potential nuclear waste depositories. Knowing that there is always a very strong NIMBY reaction to putting harmful waste near population centers, the researchers wondered how hard it would be to convince people to accept the proposal if they were made to understand the importance of the nation’s nuclear energy program and then essentially asked to just ‘take one for the team.’ Surprisingly, over half of the townspeople accepted the proposition following a town hall meeting that did just that. Some altruistic motivation – social obligation, national pride, sense of fairness – made these people willing to take the risk of having a waste facility in their backyard. Surprising, but not mind-blowing.
But here’s what is:...
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