investors’ choices are also a question of values ​​and affects

When one evokes the figure of the investor, the words of values ​​and emotional do not come to mind spontaneously. And for good reason, in the collective imagination, the trader like the stockbroker act rationally, they speculate to get rich on the basis of data and forecasts. Similarly, in financial theory, the rationality of the investor has long been considered, in the same way as that of thehomosexual from the neoclassical economic theory from which it derives, as aiming to maximize a form of utility: the risk-adjusted return of a portfolio of assets.

Yet, in an apparently paradoxical way, our research on equity crowdfunding investors, participative equity finance, shows that the concepts of values ​​and affective states (moods, emotions, preferences, etc.) .) are relevant in explaining, in part, the choices of these economic agents.

Daniel Kahneman, 2002 Nobel Prize in Economics.
World Economic Forum/Flickr, CC BY-ND

Indeed, the context of uncertainty that surrounds start-ups, often in the seed phase, leading a fundraising campaign, is conducive to an intuitive rather than analytical decision according to the dichotomy of reasoning, intuitive or more thoughtful , popularized by the 2002 Nobel Prize in Economics, the American Daniel Kahneman in his book System 1, System 2: the two speeds of thought (French version published by Éditions Flammarion).

In fact, the absence of history and data necessary for statistical analysis creates a context of strong informational asymmetry. In other words, the investor does not have as much information as the entrepreneurial team on the real prospects of the project. This situation encourages the investor to identify quality signals (patents, entrepreneurs’ diplomas, first commercial successes, etc.) or even to follow the decisions of other investors by imitation.

A matter of values

But these explanations do not account for all observable decisions. A psychological factor, potentially unconscious for the investor himself, also comes into play: the adequacy of his values ​​to those advocated by the project. Note that this component of the decision is disconnected from the issue of information asymmetry and is not linked to any profitability objective either.

But what exactly are values? Social psychology teaches us that these are strong beliefs, inseparable from affects, acquired socially, in particular through contact with the family. They act as a motivational force when activated, directing decisions and behaviors towards realizing the value at stake in a given situation.

Thus, an investor for whom the value of benevolence would be a priority will naturally be interested in a social business project. Moreover, by financially supporting this type of project, the investor will be in phase with his values, this psychological consonance resulting in an affective state of pleasure.

When a start-up raises funds, investors have little information about the real prospects of the project.
Pxhere, CC BY-SA

In the context of equity crowdfunding, we have been able to show that two singular values ​​stand out by the importance of their effect on the choices of investors: “universalism” and “power”. Universalism is a value turned towards others, which covers the concepts of altruism, protection of others and nature, while on the contrary, power is turned towards oneself, it attaches importance to prestige and to the acquisition of wealth.

Notably, these two values ​​correspond to the two archetypes of the classification of socially responsible investment (SRI) investors, a segment of sustainable finance that offers investors a mixed analysis grid: financial and extra-financial.

Indeed, the classification of SRI investors distinguishes the investor value basedaltruistic and willing to invest in accordance with their values, of the investor search for value (the word “value” here referring to financial value), interested in the profitability of their investments and for whom extra-financial criteria are nothing more than an additional signal of quality.

The link with the concept of value is then the following: the investor value based is carried by the value of universalism, while the investor search for value is driven by the power value.

The role of the affective

The concept of value therefore seems relevant to account for the choice of investors, whether they are financing young unlisted companies in the sphere of private equity (case of equity crowdfunding), or whether they are trading securities of companies listed on the financial markets (case of SRI).

Moreover, if, as we have specified, values ​​and affective states remain strongly intertwined, the latter can be aroused by mechanisms other than the activation of values. In this regard, the study of the affective states of investors is particularly instructive.

Behavioral finance, this field of knowledge at the crossroads between finance and psychology, studies in particular the affective biases of investors, relative to the reference ofhomosexual. These works show the influence of the affective on the choices of investors, whether or not they are financial professionals, the latter being however less sensitive to this bias.

In equity crowdfunding, studies show that the passion of the entrepreneur, manifested in the video pitch, arouses the enthusiasm of investors by emotional contagion effect, resulting in the collection of more resources. Among business angels, who are generally wealthy and qualified, the investment decision results from a holistic process of subjective appreciation where intuition plays a key role. However, this intuition is a concept that is based on the experiences of the decision-maker and their affective anchoring.

Beyond the study of private equity players, researchers have also looked into the affective biases of players operating in the financial markets. By way of illustration, empirical results show that the feeling of regret, and its opposite, pride, explain the tendency of investors to sell securities whose value has risen too early and to hold those whose price has fallen too long. The feeling of pleasure, already mentioned, has also been the subject of work demonstrating a correlation between the decisions of individual investors and their propensity to gamble, thus reinforcing the comparison between traders and lottery players.

Once again, this academic work shows that emotions, like values, influence investors, both in private equity and in the financial markets.

Finally, it seems that, against all expectations, the investor is partly driven by his values ​​and emotional states. This psychological reading grid seems to be all the more relevant in the current context where, following an almost generalized awareness of the climate emergency, sustainable and impact finance is taking on a growing role. Indeed, this is based precisely on an ethical value of “universalism”, taking into account the social and the preservation of nature.

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