Are we hardwired to make impact investing impossible?


Neuroscience suggests that doing good and pursuing monetary reward – as conflated into “impact investing” – may be uncomfortable bedfellows at best and completely incompatible at worst.

Why? Consider what we’ve learned about how the brain works.

Altruistic acts – think volunteering to work with kids in your local summer play scheme or Comic Relief’s work in Africa – have been shown by researchers  to stimulate a section the size of a walnut at the upper back of the brain, called the posterior superior temporal cortex, or pSTC. The pSTC is activated by what psychologists call ‘intrinsic motivation’. (Tankersley, Stowe & Huettel, in Nature, 2007.)

Monetary rewards – like gambling on the Grand National or investing for your pension – stimulate a different section, in the lower front part of the brain, called the nucleus accumbens (according to Knutson et al in the Journal of Neuroscience, 2001). The nucleus accumbens is stimulated by what psychologists call ‘extrinsic motivation’.

Why does this matter? Because of the ways in which intrinsic and extrinsic motivations interact. Behavioural psychologists have shown that activity in the nucleus accumbens appears to override activity in the pSTC.

In a 2000 study, researchers offered subjects the opportunity to earn money for a charity at varying levels of financial reward – from zero to the equivalent of 45 pence – for responding to a simple time reaction game. Success in earning money for the charity activated the pSTC whereas earning money for themselves did not (Gneezy and Rustichini in The Quarterly Journal of Economics). Across the board, when subjects were offered small rewards (around 1.5 pence), they answered incorrectly more often than when they were offered no rewards at all. Some subjects did perform slightly better in response to larger rewards (around 45 pence), but not in proportion to the increase.

In other words, introducing the promise of monetary reward can actually reduce the motivation to do good – and throwing more money at the problem doesn’t yield proportionate returns. Extrinsic motivation trumps intrinsic.  Monetary reward wins out over altruism. Is this why finance-first approaches are coming to the fore over impact-first approaches in the field of impact investing?

In short, the evidence suggests that our attempts to combine social impact and financial return, while intellectually appealing, are impeded by physiological and psychological factors that are incredibly difficult, perhaps impossible, to overcome.

Further investigation is worthwhile. Is it not time that the world of impact investing sought to understand how the sector is developing by tapping other disciplines, such as psychology and neuroscience, and leverage existing knowledge for the sector’s benefit? Surely we need a more stimulating and sophisticated conversation about the challenges facing this new and emerging field?

I welcome critique, challenge and in-depth conversation around this topic, in furtherance of a field that increasing numbers of people are working in and caring about deeply.