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Behavioral Finance

What Role Can Psychology Play in Impact Investing?

There are many ways psychology can help investors do good by doing business.

Key points

  • The ambition to do good by doing business is familiar; however, it is realized in impact investing.
  • There are myriad ways that social psychology can help foster effective processes in impact investing.
  • Social psychology can reveal scores of biases and blind spots that affect all aspects of impact investing.

Co-authored by Samuel Wilson and Diane Sivasubramaniam

As Deborah Burand and Anne Tucker (2019) outline, although the ambition to do good by doing business is not new, the burgeoning realization of this ambition in impact investing is.

Impact investing, defined as an investment strategy that aims to deliver positive returns for both one’s portfolio and society as a whole, is a huge and growing field. Over a trillion dollars worth of “impact” assets are currently under management by impact investors.

Lawyers play critical roles in shaping the agreements that underpin impact investing and help clients structure and document new legal forms, investment vehicles, and products. What role can social psychology play in impact investing and in fostering effective processes in an impact-oriented legal practice?

We had the opportunity to explore these questions at the recent conference, Legal Issues in Social Entrepreneurship and Impact Investing—In the US and Beyond, hosted by the Impact Investing Legal Working Group and the Grunin Center in New York.

Although there are several ways to approach this inquiry, the four core characteristics of impact investing outlined by the Global Impact Investing Network provide a helpful framework for considering how psychology can inform the work of lawyers in the context of impact investing.

1. Intentionality

The first characteristic is intentionality. Impact investing is marked by an intentional desire to contribute to measurable social or environmental benefits. Stated differently, impact investing aims to benefit the public good.

However, although efforts to improve the public good are laudable, what does the “public good” really mean? And what meanings do we need to consider whenever we seek to act in the public interest in a multi-stakeholder, shared-power world?

Although the meaning of terms like "public good" or "common good" seems self-evident, this is not the case. When the myriad writings of experts on the public good, from philosophy to psychology, are considered, one thing is clear: there is no single, determinate public good.

Recent research into the folk concept of the common good shows lay beliefs about the public good comprise three interlocking concepts about the "goods" that comprise the public good (outcomes), the processes through which the public good is realized (processes), and the people for whom the public good is sought (beneficiaries). As observed by the philosopher Hans Sluga, normative propositions about the public good vary along all these dimensions and we need to grapple with all of them in impact investing and responsible social innovation more broadly.

2. Use Evidence and Impact Data in Investment Design

The second characteristic relates to the use of evidence and impact data in investment design. This means that impact investments cannot be designed on hunches but rather require evidence and data, where available, to drive intelligent investment design that will be useful in contributing to the public good.

But how do we use evidence and data? We are not algorithms, objectively weighing and combining data to determine a decision. As humans making decisions about evidence and data, we are beset by our biases and blind spots.

For example, consider the way hindsight bias might affect our evaluation of a company’s performance. The knowledge a company has met (or not met) its goals for financial performance will skew our assessment of any other data about the company. This knowledge blinds us to the merit of the company’s processes or decisions that led up to that outcome.

An array of other biases might affect our decisions about risk, attributions of responsibility for success or failure, judgments about moral deservingness, and even our choices about which pieces of evidence and data to consider. The key message from social psychology is that while we should aspire to rely on data in impact investing, we should not assume our ability to weigh that evidence objectively.

3. Manage Impact Performance

The third characteristic pertains to the requirement to manage impact performance, which necessitates that investments be managed toward the goal of creating measurable social or environmental benefits. Among other things, this includes having feedback loops in place and communicating performance information to support others in the investment chain in managing toward impact.

Here, impact investing calls for a dynamic exchange of information, where stakeholders are given the chance to provide input (also known as “voice”) that will help these investments to produce better outcomes.

Decades of psychological research have shown the importance of voice: When people feel they have been given a voice in a decision-making process, they judge the process and its outcomes to be fairer and evaluate those who ran the process more favorably.

In impact investing, voice is often achieved through community consultation, where those who will be impacted by an investment have the chance to be consulted about it. But voice is not without its pitfalls. Some scholars have warned of “false consciousness,” where voice is used as a tool to fool people into being happier with outcomes that are not actually fairer.

If impact investments are to rely on community consultation and other forms of voice, psychologists can contribute to the evidence-based design of these consultation processes so that stakeholders have effective and ethical ways to participate in decision-making processes.

4. Contribute to the Growth of the Industry

The fourth characteristic relates to the injunction to impact investors to contribute to the growth of the impact investing industry. This calls on impact investors to contribute to the greater good of the industry by sharing their learnings to enable others to learn from their experience what actually contributes to social and environmental benefits.

What does this mean in the context of a legal practice with dual commitments to the traditional goal of profits combined with an additional goal intended to deliver a social benefit? Or the use of existing law in combination with the creation of new legal forms, which calls for the combination of tried and tested good or best practice and innovative "next" practice.

All of this suggests that success in impact investing at the practice level, as well as more disinterested contributions to the growth of the industry, requires paradoxical and meta-paradoxical leadership (e.g., to apprehend and lead in the context of the paradoxes of the public good), ambidextrous leadership for innovation (e.g., to sustain the exploitation of extant law and the creation of new investment vehicles) and integrative leadership (e.g., to foster the types of partnerships across organizational, sectoral and/or jurisdictional boundaries that are required to improve the public good).

Thus, although it is not immediately obvious, there are myriad ways that psychology can help foster effective processes in impact investing. Psychology can reveal scores of preferences, biases, and blind spots that affect everything from our decisions about risk to judgments about moral deservingness. Overall, there are myriad applications of psychology to impact investing that have a bearing on all aspects of the burgeoning field.

Note. A version of this post was presented at Legal Issues in Social Entrepreneurship and Impact Investing—In the US and Beyond, hosted by the Impact Investing Legal Working Group and the Grunin Center in New York.


Burand, D., & Tucker, A. (2019). Legal literature review of social entrepreneurship and impact investing (2007-2017): doing good by doing business. William & Mary Business Law Revew, 11, 1-76.

Wheeler, M. A., Wilson, S. G., Baes, N., & Demsar, V. (2024). A search for commonalities in defining the common good: Using folk theories to unlock shared conceptions. British Journal of Social Psychology, 62(2), 956-974.

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