LITERATURE REVIEW – DISSERTATION PAPER
2.1 Introduction
Behavioural economics theories and scholars have made major developments in explaining the irrational behaviour individuals in the economy (Albaity&Rahman, 2012). Many
studies have demonstrated the existing strong relationship between socio-cultural factors such as race and investment decision-making (Huang, 2008;
GuisoSapienza&Zingales, 2008; Beugelsdijk&Frijns, 2010). This implies that when a person makes a decision on whether to make an investment decision or not, either as a
personal decision or as an agent of an entity, the implicit biases that the individual holds plays a major role in shaping the decision. This implies that individuals’
implicit biases are reflected in higher decision-making levels such as governmental and corporates since these decisions are reached by a ground of individuals who
hold implicit attitudes and stereotypes about a certain group. As a result, decision makers’ behaviour can deviate from logic and reason, which would affect the final
investment decision-making processes (Kent, Baker &Ricciardi, 2014). At governmental and corporate levels, poor decisions can be traced back to the way the decisions
were made. This might occur when alternatives were not clearly defined, the right information was not collected, the costs and benefits were not accurately weighed.
However, the problem is not always related to the decision-making process but is also attributable to the cognitive perspectives of the decision maker. It is with this
regard that most scholars criticise the principles of CSR, SIB or SROI as having failed in exploring the decision making of investment closely to understand how
leaders within a business or a government decide on investment where a social value is the expectation; and where a social subjective meaning is given to that
decision.
This literature review critically analyses decision-making literature to identify factors that contribute to decision making for investments that benefit Indigenous
wellbeing. This will be approached in various sections. The first section focuses on the applicability of behavioural economics in investment decision making after
which the role of business concepts (CSR, SIB and SROI) on creating social value is evaluated as well as the role of implicit biases in investment-decision making.
2.2 Behavioural Economics Within the Concept of Investor Behaviour
2.2.1 The Concept of Investor Behaviour
Behavioural economics is related to the sub-field of behavioural finance. These behavioural-based fields of inquiry study the effects of psychological, social,
cognitive, and emotional factors on the economic decisions of individuals and institutions. The aim is to identify the consequences of such decisions on market prices,
returns, and resource allocation. However, the focus is not always narrow and also considers how different behaviours, environments, and tendency towards experimental
values, influence the decision-making process (Lin 2011). It is worth noting that critics of behavioural economics typically stress on the rationality of economic
agents. They contend that experimentally observed behaviour has limited application to market situations. Proponents of behavioural economics note that neoclassical
models often fail to predict outcomes in real world contexts. However, it is agreed behavioural insights can influence neoclassical models.
Behavioural economics focuses on the bounds of rationality of economic agents—the behaviour and influence of agents. Behavioural models have been developed to frame
the activities of these agents. These models typically integrate insights from psychology, neuroscience, and microeconomic theory. In so doing, behavioural models
cover a range of concepts, methods, and fields (Minton&Kahle, 2013).
The use of the term “behavioural economics” in U.S. scholarly papers has increased in the past few years, as shown by a recent study. There are three prevalent themes
in behavioural finances (Shefrin 2002).

Figure 1: Prevalent themes in behavioural finances
These include Heuristics, framing and market inefficiencies.
• Heuristics: People often make decisions based on approximate rules of thumb and not strict logic.
• Framing: The collection of anecdotes and stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events.
• Market inefficiencies: These include mispricing and non-rational decision-making.
Traditionally economics and microeconomics was closely linked to psychology. In his Theory of Moral Sentiments, Smith (2010) presents a psychological explanations of
individual behaviour. The Theory of Moral Sentiments divides moral philosophy into four main components, namely: Economics (also known as familial rights); politics
(also known as individual and state rights); natural liberty and private rights; and ethics and virtue (Smith, 2010). The theory was concerned with the ways that
fairness and justice informed the relationship of society to economic movements and purpose. The theory further postulates that despite of one’s selfishness, there
some individual principles such as sympathy that exists through the logic of mirroring. The theory views principles from the anti-reductionist point of view, and
argues that morality cannot be reduced to a set of divine or natural law. Smith (2010) argues that principles and moral philosophy does not focus on the consequence of
the actions, but rather, on their propriety, which he describes as the motive that inspires the actions. Therefore, according to Smith (2010) Theory of Moral
Sentiments, individuals are motivated to take moral actions, not to avoid the consequences of the actions, but mainly because they want to conform to the
conventionally accepted standards of morals or behaviours.
In modern literature, this work is linked with the behavioural economic approach. In her conceptualisation of the CSR theoretical framework, Caroll (1991) cited four
forms of social responsibilities that constitute CSR, namely, economic, legal, ethical and philanthropic. Further, Caroll (1991) noted that the ethical and
philanthropic functions of CSR have gained more momentum and significant place in the society over the years. This has been characterised by the shift of focus from
the economic functions of profit maximisation and legal functions of compliance to law to the ethical functions of justice, avoiding harm and fairness and
philanthropic roles of good corporate citizenship and promotion of human welfare.According to Carroll (1991), one of the main role of managers under the CSR is to
become moral rather than immoral or amoral, and to manage all the stakeholders in an ethical manner by exercising ethical sensitivity in all actions, policies and
decision making processes.
Bentham (1778) wrote extensively on the psychological underpinnings of utility—a measure of preferences over some set of goods and services. The concept of utility
represents the satisfaction experienced by the consumer of a good. Since benefit cannot be directly measured (i.e., by putting a value on the satisfaction or happiness
experienced from a good or service), economists instead devised ways of representing and measuring utility in terms of measurable economic concepts. These types of
measures based on an economic notion of goods have evolved into social impact. Millar (2000) highlights how social measures, social good, philanthropic rewards and
social return on investment (SROI) a cost benefit analysis has been used to demonstrate the social impact of investments. The focus of inquiry for this paper is
primarily on SROI, social impact and the bias upon rational approach to investment decision making, as will now be discussed.
2.2.2 The psychology of investment and value of race
During the development of neo classical economists, researchers sought to reshape the discipline as a natural science, deducing economic behaviour from assumptions
about the nature of economic agents. The suggestion was that agent psychology was fundamentally rational. However, rationality has since been explored further and more
sophisticated psychological explanations have been revealed.
Revelations about economic psychology emerged in the 20th century in the works of Pareto and others. Pareto gave us the term ‘elite’ and in simple terms his thinking
became the practical arm of the Smith’s philosophy; the quantitative application to Smiths qualitative thinking. Pareto (1935) understood that income follows a ‘power
law’ probability. In simple science term of thermodynamics, the measures of difference values in an environment can help define and locate the value or quantities and
measure of that ‘value’. This formula in relation to power, class and race – means measuring the environment and surrounds of decisions that relate to investment
can define what value is given to race in the present research inquiry.
2.2.3 Prospect theory
Kahneman&Tversky (1979) proposed cognitive psychology to explain various divergences of economic decision making from neo-classical theory. They identified two stages:
an editing stage and an evaluation stage; and further refined the theory to only the evaluation stage now known as cumulative prospect theory (Kahneman&Tversky, 1996).
The main feature of this theory was that it allowed for non-linear probability weighting in a cumulative manner, which was originally suggested in rank dependent
utility theory (Kahneman&Tversky, 1996). Psychological traits such as overconfidence, projection bias, are now part of the theory, “integrated insights from
psychological research into economic science, especially concerning human judgment and decision-making under uncertainty” (Kahneman&Tversky, 1996). How this interacts
with race bias in decision making and that impact is yet to be explored, and research in social investment and Indigenous race value are not part of the system of
thinking of approach as work in the transition of social good a neo classical notion, and social return on investment is so new.
Despite a great deal of work, there is no real consistent behavioural theory yet agreed or accepted. Behavioural economics scholars also have no unified theory, and
the argument is that work undertaken area unrelated observations. A foundational behavioural theory that can be tested in many domains as a competitor to neoclassical
theory is what is required to move this theoretical growth; further research will explore this position. As we enter more discussion and applications of social impact
investment, and the globe starts to agree a set of metrics for wellbeing, and social value we may be able to move beyond survey-based techniques to a more positivist
approach of quantifiable value that can be replicated across multiply domains.
2.3 The Concept of CSR in Social Investment Decision Making
2.3.1 The Scope of CSR
The concept of CSR requires corporations to undertake business in a manner that is ethical, beneficial and friendly to the society or community (Ismail, 2009).
Initially, the concept of CSR focused on philanthropy but this has changed over the years with the focus shifting on society-business relations, which are centred on
the contributions that the organisation makes towards solving existing social problems. This means that the goal of CSR has shifted from profit maximisation and market
performance to economisation ethics that involves the use of organisational resources to create wealth and value in the community and enhance the general society’s
standards of living. Therefore, the concept of CSR in the current marketplace can be described as a business model where the organisations put the society’s interests
first (Roja&Sherina, 2015). This is done through the analysis of the effect that the organisational activities would have on the stakeholders, suppliers, consumers,
employees, communities and shareholders as well as their environment (Ismael, 2009). This implies that corporations have to comply with the existing laws and
regulations, work with other stakeholders and the government, and voluntarily take initiatives that have the interests of the stakeholders and the community at large
(Roja&Sherina, 2015). While the scope of CSR is quite extensive and involves a variety of activities such as relationship development, partnerships with local
communities and other social actors, environmental conservation and sustainability and making socially sensitive investments among others (Ismail, 2009), the focus of
this study is on the relationship between CSR and investment decision-making in social projects.
2.3.2 Theories of CSR
On the other hand, Garriga&Melé (2004) classified the theories of CSR into four distinct categories, that is, political theories, ethical theories, instrumental
theories and integrative theories as the table below shows. In his classification of the theories of CSR based on the role of corporates on the society, Secchi (2007)
developed these theories into utilitarian theory, relational theory and managerial theory as shown in Table 2.1.

Table 2.1: CSR’s managerial, utilitarian and relational theories

Table 2.2: Classification of CSR theories based on their approaches
A look into both Secchi (2007) and Garriga&Melé (2004) classifications show some similarities in the way the authors conceptualised CSR. From tables above, it is
evident that these theories are interconnected and identify the various ways through which CSR adds value to the society. The utilitarian theory focuses on the
individual’s view and the mechanical function of corporates. This allows for individualism to give way to public control, profit maximization is overtaken by
determinism and personal responsibility turns to social responsibility (Lee, 2008). In this regard, utilitarian theory is related to the instrumental theory because
both view social activities as means of attaining economic results and investing in the communities to improve the people’s livelihoods.
The managerial theory is organisational oriented and allows for the measurement of the social effect while the relational theory is based on values and thrives on the
inter-dependence between corporations and the society (Secchi, 2007). Instrumental theories are geared towards attaining economic objectives by undertaking social
activities, the political theory focus on using the corporates power within the political arena while the integrative theory focuses on bringing the management, public
responsibility, corporate social performance and stakeholder management issues together (Ismail, 2009). Lastly, ethical theory puts more emphasise on the strategies of
achieving a good society (the common good) and sustainable human development (Garriga&Melé, 2004).
In this study, the ethical theory is the most applicable because through it, individual actors (boards and financial decision makers) can use the theoretical
approaches and goals of ethical theory to overcome the racial and implicit bias issues for the common good and sustainable human development. On the other hand, an
organisation whose CSR concept is based on a political theory’s would most likely create loopholes for investment decision makers to make implicitly biased decisions
especially when a corporate holds a lot of social power.
2.3.3 The Role of CSR in Enhancing Social Value
One of the main roles of CSR in enhancing social value is sharing the negative effects of its activities through tax and other forms that allow resources to be re-
channelled to the society for more useful projects (Ismail, 2009). CSR also gives the corporations an opportunity to be involved in social system and create social
capital, which is useful in enhancing the social value (Lee, 2008). This inter-dependence between the society and the corporates creates an opportunity for sustainable
development. A good example is where corporates funds community-development projects through local organisations, which impoverishes the community (Secchi, 2007). In
the long-run, these efforts create an opportunity to alleviate poverty, create employment and enhance the standards of living among other social benefits. In the
long-run, the national GDP grows and the economy thrives.
One of the major challenge of CSR is that most corporates assign the role of choosing the social activities and investment decisions to specific individuals such as
business leaders, the board or financial decision makers. The danger with this practice is that the individuals responsible for these decisions might make them based
on their implicit views rather than value creation (Lee, 2008). It is with this regard that Peloza& Shang (2011) recommend an increased scrutiny into the investment
decisions reached by the boards and decision makers. This can be done through the application of the managerial theory that allows the outcomes of the CSR activities
and the investments made be measured to ascertain whether and how affect the society as well as the corporate (Peloza& Shang, 2011).
From this discussion, it is clear that the success or failure of CSR and other concepts of enhancing social value such as SROI and SIB depends on both the internal and
external factors. However, as Ismael (2009) notes, the internal factors of culture (where racial notions and implicit biases are pertinent), play a major role. It is
in this regard that decision makers are advised to always prioritise ethics and the common good during the decision making process.
2.4 The Notions of Race and Implicit Bias in Social Investment Decision Making
Even though CSR, SIB and SROI have proven to be a powerful mechanism for enhancing social value, Levinson (2007) notes that the new and emerging mechanisms of
marginalisation and social exclusion are threatening the benefits of these concepts. Until recently, researchers have ignored the complicated role of racial notions
and implicit biases on decision making processes (Mansuri&Rao, 2004). Psychologists argue that even when people consciously and explicitly support fairness and the
common good, it is possible for the non-conscious processes and implicit biases to undermine their good intentions (Staats& Patton, 2014).
However, the studies further give a beacon of hope as they note that the issue of implicit biases in decision making can be resolved through understanding and
embracing our implicit biases. Another way through which the implicit bias in decision making can be dealt with is through change. According to Staats& Patton (2014),
initiating change at the board or decision-making level is very crucial in dealing with implicit bias. With regard to this study’s case study, Australian government
and corporates can initiate a change in board level that involves hiring or appointing Aboriginals to the boards and decision-making levels. This would ensure that the
marginalisation of this population is minimised through representation.
The appointment of Aboriginals to these decision-making levels would not only enhance inclusion but would also create an opportunity for the organisations and the
Indigenous to work together for social change and economic development. In addition, those in decision-making levels could be subjected to an Implicit Association Test
(IAT), which helps one to understand the unconscious but deeply held attitudes and stereotypes about a certain group (Greenwald, Banaji&Nosek, 2015). The ‘Nature of
Prejudice’ is a clear touchstone for psychological research on prejudice (Allport 1954). Although extended since this time, Allport’s thinking is still the beginning
of contemporary understanding of how prejudice operatives. It is therefore important for this study to adapt Allport’s thinking to the contemporary issue of how to
affect racial bias as it concerns Indigenous investment positively, as this would contribute to the understanding of indirect measures of attitudes towards Indigenous
Australians from a behaviourist economical viewpoint.
However, for this to take place, governmental departments and corporates must come to the realisation that implicit biases do not only take place within the
conservative circles, but also take place within these institutions. The simplistic “colour blind” approach to egalitarianism (i.e., avoiding or ignoring race; lack of
awareness of and sensitivity to differences between social groups) fails as an implicit bias intervention strategy. “Colour blindness” actually produces greater
implicit bias than strategies that acknowledge race (Apfelbaum, Sommers, & Norton, 2008). Cultivating greater awareness of, and sensitivity to group and individual
differences appears to be a more effective tactic (Rudman, Ashmore, & Gary, 2001; Richeson& Nussbaum, 2004). The chosen paradigm for the primary research inquiry will
allow for themes to emerge about race, Indigenous versus other people of colour and pragmatic paradigm: to allow the literature, findings and results to emerge
simultaneously’ including other suggestions to egalitarian responses to racial basis if they reveal themselves. This allows the analysis of the framing of a prevalent
behaviour theme in behaviour finance to be explored (Shefrin 2012).
2.5 Research Proposition
From the conceptual formulation developed in this chapter, three main propositions are synthesised. These are:
• Proposition 1: Actor motives in decision making influence individual commitment to Corporate Social Responsibility
• Proposition 2: Actor processes and strategies influence individual skills and capability to lead social value
• Proposition 3: Actor processes and strategies influence individual principles
• Proposition 4: The ethical and philanthropic functions of CSR have the greatest potential of contributing to social development but they are the most
undermined by actors
• Proposition 5: Misdirected Indigenous funding aimed at crisis reaction does not yield impact with sustainable outcomes
• Proposition 6: The interaction between philanthropy support and crisis investment yields genuine sustainable development with positive intergenerational
outcomes
2.6 Conclusions
This paper has provided an overview of how the concepts of behavioural economics, CSR and notions of race influence investment decision-making. The key points raised
in this study are useful in the formulation of a stronger framework that can be used to improve the investment decision making process for the benefit of Indigenous
wellbeing as it creates more awareness on how race bias impacts investment. In the next chapter, the research methodologies are presented.