Bounded ethicality refers to the predictable and systemic ways in which people make choices and decisions without knowing and realizing their behavior’s implications. People overestimate the ethicality of their behavior and fail to recognize their underlying self-serving biases. These biases pose a significant risk to individuals, their organizations, and investment choices.
People learn to see themselves as ethical, rational, and competent enough to make objective investment decisions. The self-perception creates an ethics blind spot significant enough to hide the unconscious biases and conflicts of interest when making an investment decision.
Read on to learn more about the meaning of bounded ethicality and its effect on investing.
The Meaning Of Bounded Ethicality In Investment
The meaning of bounded ethicality in investing involves understanding and considering your potential investment’s economic, environmental, and social impact before you commit. In the bounded ethicality principle, even an investor’s capacity to make a morally correct choice is constrained by some form of limitation, whether environmental or personal.
The concept shows that people have motivated reasoning, which may limit their capacity to objectively decide on ethical matters when there is a benefit from taking the unethical route. It highlights that motivated reasoning makes it harder to make ethical choices. Therefore, your ethicality is limited.
Many ethics and compliance metrics are reliant on the integrity of the employees. For instance, many companies assume that by hiring ethical people and explaining their expectations, the employees will act accordingly. Bounded ethicality stipulates that a notion of absolute ethicality is flawed.
How To Address Bounded Ethicality In Investing
To address the meaning of bounded ethicality means recognizing the limits to your perception of ethics. Ethical investors are capable of making unethical decisions unintentionally, so challenge your decisions. Next, understand your unconscious process that could lead to limited ethicality.
Look at cultural norms and implicit discrimination and think of how they affect your decisions. Finally, recognize all the social and environmental circumstances that make you vulnerable to bounded ethicality. That way, your decision-making now moves to an enlightened self-interest approach to investment.
Enlightened Self-interest Approach To Investing
After meditating on the meaning of bounded ethicality and addressing your potential biases, you can shift how you approach investment decisions. Enlightened self-interest theory claims that people ultimately help themselves by behaving ethically. Investors with enlightened self-interest make choices that will benefit their financial interests and those impacted by their investment.
Enlightened self-interest is crucial to an investor’s success. By taking a holistic approach to your investment, you maximize returns while positively contributing to society. The form of responsible investment also ensures the stability of your returns by helping you avoid the many risks linked to unethical practices.
By considering factors like governance structures, sustainability, and transparency, you dodge the negative effects of unethical practices like environmental degradation and abuse of human rights. Taking an enlightened self-interest approach to investment also positions you as a leader amongst investors with similar values. The approach, in turn, helps you and your circles achieve long-term financial gain while positively impacting mankind.
An enlightened self-interest approach to investment also steers companies to social responsibility as they aim to get the eye of investors. The principle of enlightened self-interest claims that there isn’t any conflict between what an investor wants for themselves and others. By choosing socially responsible companies, they create a portfolio of stable worthwhile investments.
The Ethics Of Socially Responsible Investment
While bounded ethicality sheds light on the possible flaws in an ethical investment approach, self-enlightened interest broadens the perspective. When the goal is the ultimate good, from the investor down to the companies funded, there is a bounce-back effect on doing good. Take note of your biases before making investments, and make enlightened decisions when building your investment portfolio.