Bounded ethicality is a concept that comes from the field of psychology. It refers to the idea that people sometimes develop rules for themselves about what is or isn’t allowed, only to break those same rules when it’s convenient.
Knowing if you’re committing this fallacy can be challenging, but there are some signs to look out for. For example, if you find yourself rationalizing your behavior or telling yourself everyone else does it, that might mean you’ve fallen victim to bounded ethicality.
So, what does bounded ethicality have to do with making investments? Read on to find out more.
What Is Bounded Ethicality?
Bounded ethicality refers to the phenomenon of people ignoring ethical guidelines or rules in favor of achieving an end goal. It can be seen in behavior such as sacrificing the safety and well-being of others to achieve one’s investment goals or fudging numbers to help your portfolio look attractive over a certain period.
Here are some more detailed examples of bounded ethicality when it comes to investing:
Implicit Prejudice and Conflicts of Interest
One type of conflict of interest occurs when someone has hidden biases that affect their judgment. For example, suppose you’re looking to invest in a fund or company because you have extensive experience with their product line but aren’t sure whether it’s the right choice. Still, your genuine opinion is that their products are not worth investing time and money into. In that case, you have an implicit prejudice.
Focusing on Specific Goals
Sometimes we focus so much on our desired outcome that we don’t care how we get there–the ends justify the means. The risk of missing an opportunity may seem less important than the potential rewards.
As an investor, you might agree to put your money in a fund or company with the knowledge that your investments might not break even. You might feel bad about potentially losing money but also feel it would be worse not to take advantage of this opportunity.
The Right Reason for the Wrong Reason
Another type of bounded ethicality happens when you give yourself justifications for not following your guidelines or rules. For example, you tell yourself that it’s okay to invest in companies with practices you disagree with so long as you don’t do it too often.
But it can be hard to tell whether or not you’re doing this type of reasoning until after the fact. If you justify your actions by telling yourself other people do it too, then chances are good that you are investing unethically through bounded ethicality.
The Law of Social Proof
Bounded ethicality also arises when we base decisions on other investors’ actions. Let’s say you want to put your money in a company whose practices and operations make them seem more trustworthy and reliable to potential investors.
To get more investors on board, the company takes advantage of the law of social proof. When people see others like them making decisions one way or another, they’ll often do the same.
Investors should be aware of the ethical challenges that come with investing. They also should be aware that their investments can substantially impact people and ecosystems. By recognizing these challenges and considering how investments will affect people and the planet, investors can simultaneously strengthen their portfolios and mitigate risk.
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