The Trouble With Impact Investors’ Brains

Creating a clear value proposition for impact investors may be less about finding the right mix of financial and social returns than it is about choosing which of the two you’re really going to be about.


Economic Theory and Irrational Behaviour

Basic economic theory assumes that more money equals more motivation, but this has been turned on its head by experimental behavioral economics as well as new brain science. We now understand that behavior and motivation are far more complex animals and that rationality is more myth than foundational principal. Daniel Pink’s book “Drive: The Surprising Truth About What Motivates Us” provides a number of examples how motivation and performance can actually decline as monetary incentives increase.  Some of this can be explained by the structure of rewards that create perverse incentives that make CEOs and others more myopic and risk hungry. But what about motivations and performance related to social good?  For example, most people I know working in international development are aware they’ve left something material on the table in their job search – they’ve taken jobs not because they offered the greatest pay and benefits, but because they offered the chance to make the most impact on the world.  It is similar with impact investors – they mindfully make financial returns subordinate to social impact returns.  Surly, thickening the layer of monetary incentives atop these largely altruistic motivations would only strengthen them, right? Not necessarily.

Consider the example of Switzerland’s nuclear waste retold in the Brafman brothers’ book “Sway: The Irresistible Pull of Irrational Behavior“.*  In 1993 the Swiss government identified two small towns as potential nuclear waste depositories. Knowing that there is always a very strong NIMBY reaction to putting harmful waste near population centers, the researchers wondered how hard it would be to convince people to accept the proposal if they were made to understand the importance of the nation’s nuclear energy program and then essentially asked to just ‘take one for the team.’ Surprisingly, over half of the townspeople accepted the proposition following a town hall meeting that did just that. Some altruistic motivation – social obligation, national pride, sense of fairness – made these people willing to take the risk of having a waste facility in their backyard. Surprising, but not mind-blowing.

But here’s what is: in an effort to encourage the hold outs to go along with the proposal, the researchers and government went back to the townspeople and offered to pay them about $2200 per person per year. Now, the rational assumption would be that the second vote would find the same 50.8% that supported the proposal on purely altruistic motives still on board plus some additional percentage of the opponents swayed by the financial incentives. What happened instead, though, was that support fell by half!

“Instead of being motivated but the financial incentive, the townspeople were swayed to reject the nuclear dump en masse: only 24.6 percent of the people who were presented with the monetary offer agreed to have the nuclear dump close to their town (compared with the 50.8 percent who agreed when no money was offered). … Even when the researchers sweetened the deal to $4,350 – and then again to $6,525 – the locals remained firm in their opposition. Only a single respondent, in fact, changed his mind and accepted the offer when more money was put on the table.”

How could that happen?

Brain Science and Value Proposition

It turns out that the brain centers responsible for making or losing money and giving it away are not only separate, but mutually exclusive! When you make or lose money for yourself, the nucleus accumbens is at work – the same brain center associated with the excitement of flirting, watching your team win, gambling, and most pleasure drugs. It’s the dopamine-releasing part of the brain that scientists call “the pleasure center”, and it’s responsible for addictive behavior that requires ever more stimulation for the same high.

Altruistic behavior, on the other hand, excites a part of the brain called the posterior superior temporal sulcus. This is the brain center responsible for social interactions and bonding. MRI imaging shows that even just watching someone else play a game that pays a financial reward to a charity will light this center up.

So, one might think that humanitarian workers and impact investors have the best of both worlds. They get their pleasure center excited because they are, in the end, getting paid something. At the same time, their do-good motivation and sacrifice of personal financial reward for the better good gets their ‘altruistic center’ excited. But this isn’t how it works. The brain centers are mutually exclusive – that is, they can’t both be in operation at the same time. Either you are motivated by financial return or by altruism, but not both! When the Swiss government offered money to the townspeople, the part of the brain that considered the offer switched from the ‘altruism center’ to the ‘pleasure center’ and it turns out that it costs a lot more to make a convincing case the later.

This could have some significant implications for how we think about the value proposition on offer to impact investors. Typically, the sector believes the value proposition is both doing good and making money. Not only is this often a problematic proposition from a practical point of view, but it may be one that fundamentally misunderstands how motivation works from the point of view of brain science.

Whether you’re a bridging organization (like an impact investment fund manager or a social impact bond originator) or a social impact program implementor, you have to be clear about the value proposition you offer investors. What are you really offering and how do you properly market it? As Mulago Foundation‘s Kevin Starr argued in a must read three-part series for SSIR called The Trouble With Impact Investing, “There’s only one bottom line. It ought to be impact.” He makes good arguments: (1) most high-impact solutions in development don’t earn revenue, let alone pay you your money back plus interest, (2) overcoming market failure to reach the poor requires a subsidized effort, (3) just because something earns revenue doesn’t mean it should be forced to make a profit, and (4) focusing on profit can drive an organization off mission. (Excuse the plug, but I’ve previously decried how the last two have played out in the micro-financial sector in Profits & Perverse Incentives: The New Face of Microfinance.)

I’d like to add a fifth argument: if you chase too hard and offer ROI designed to appeal more strongly to the profit motivation, you may unintentionally crowd out the altruistic motivation, making it more expensive than necessary to capture the same impact investment dollars. As the cost of attracting impact investment funds increases, so too do the problems inherent in squeezing profit out of social impact programs.

In the second part of the SSIR series (actually written by Starr’s colleague Laura Hattendorf) an argument is made for clarity of primary investor purpose – profit or impact. But they only go so far as to say that the mix can be fuzzy, not impossible. “They are not mutually exclusive, but how [impact investors] make decisions, deploy capital, and support organizations is likely to be much different depending on which approach is primary.” But what if they actually are mutually exclusive as the brain science suggests? What if the assumption that people are actually capable of processing and balancing their blended motivations in a double or triple bottom line in their investment strategies is wrong?

Solutions: Decisions in Stages, Markets in Strata, Revenue in Tranches

One potential solution is to utilize decision processes that overcome the brain’s limitation. While their brains may not be able to process both motivations at once, there is no reason to doubt the reality of impact investors’ blended motivations. If they were truly limited to maximizing only one or the other, then impact investors simply wouldn’t exist. If they say they want both profit and impact, so be it. I would guess that the limitation is only deal and moment specific, that is, as we think about a particular opportunity at a particular time, only one of the two brain centers is active. But, what if impact investors used processes and tools that get around this limitation? For example, a multiple stage vetting process that first scores options on their profit merits (such as setting a specific minimum ROI) and then considers those that pass the first filter on their social impact merits (or visa-versa). Or, creating a balanced score card that spits out a standardized grade based on all the factors that you decided ahead of time are relevant. Given the complexity of many impact investment products, it is unlikely anyway that investors don’t already consider them from various angles over time, swapping between brain centers as they do.

Another potential solution is for fund seekers to purposefully stay out of the middle by assuming that, at any given moment, an impact investor is either thinking out of profit motivatation or impact motivation, but not both. Regardless of the legitimacy of blended motivations, create products designed to primarily target just one at a time and make sure you have both kinds in your portfolio. You won’t be able to sell a high impact opportunity to someone seeking profit if it doesn’t have the right mix of financial risk and payout, and you cannot sell an opportunity with high financial return to someone seeking impact if it doesn’t have the right assurance of impact.** In fact, as already mentioned, if you sell the financial return too hard to someone who’s largely in it for the impact, you run the risk of tripping his thought process from the ‘altruistic brain center’ to the ‘pleasure center’. And that could cost you.

While impact investors themselves may yet be confused about which primary hat they wear at any given time, their brains aren’t. Deals need to be structured that allow impact investors’ true colors to show at the moment of decision. One way to do this is suggested by Michael Belinsky from Instiglio in another SSIR article, Social Impact Bonds: Lessons from the Field. He notes pay-for-success contracts may ultimately encompass several ways of engaging the different types (read motivations) of impact investors out there. Social Finance (USA) may soon try out a scheme in a Massachusetts social impact bond project that slices the expected revenue stream into tranches, offering the lower-risk tranches to foundations, and pitching the premium tranche to “investors with the highest appetite for return.” Belinsky also notes that the New South Wales government in Australia is “exploring attracting for-profit investors by offering to share some of the bond’s downside risk-essentially buying the lowest tranche of its own bond.”

Impact investing is a young and rapidly evolving market with many unknowns and uncertainties, especially the nascent social impact bonds market and the not yet existent development impact bonds market. Whatever the solutions are that end up getting tried, proved and adopted, it’s important for everyone to be as clear as possible about what’s in this new market. We know what pure investors demand (profit), and we know what most foundations and grant-makers demand (impact), but what do impact investors want? They say they want both, but their brain structure forces them to consider what’s on offer in one of  two very different and mutually exclusive brain centers. One would hope that impact trumps profit and that the primary consideration takes place in the brain’s ‘altruism center’, but with profit in the mix, this is not guaranteed. So, the question is how to match the supply of investment opportunities to match the real demand. This most certainly will be a discovery process as different combinations of risk, profit, and impact are experimented with, as different structures, including segmented tranches of revenue streams, are developed, and as different decision processes are tried and evolved.


* The study behind the story is titled “The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out,” was conducted by Bruno S. Frey and Felix Oberholzer-Gee, and published in the American Economic Review (1997)

** Measuring impact will continue to be increasingly important as impact investors who consider opportunities in the ‘altruistic brain center’ continue demanding more rigorous accountability to social ROI such as that which is easily available to those whose primary consideration is financial ROI.


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Categories: Development Finance, Social Enterprise


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5 Comments on “The Trouble With Impact Investors’ Brains”

  1. Andrew Parrucci
    November 27, 2013 at 10:34 am #

    Some great insights here, especially for those of us working in impact investing in a communications or marketing role. Some related thoughts at

    • January 3, 2014 at 4:33 pm #

      Hi Andrew. Thanks for the link and for the mention in the post. Some good stuff there.

  2. January 1, 2014 at 8:09 am #

    I am relatively new to the impact investing industry, and the discussion on the competition between altruistic and financial motivations is interesting.

    However, another facet for me would be how morals or ethics come into play, i.e. even if an impact investor is motivated purely by financial gain, presumably his morals might be cause him or her to negate investments that did not have a positive impact as less ethical or moral.

    In a nutshell, my question is whether impact investment requires any altruistic motive at all. You might argue that morality and altruism are invariably attached, but intuitively, it seems that one is passive and the other is active.

    I would be grateful to hear your opinion on the matter.

    • January 3, 2014 at 4:28 pm #

      Hi Ron,

      I think what you’ve hit on is the difference between socially-responsible investing and impact investing. Socially-responsible investing is a concept that has been around a bit longer than impact investment and is, as you say, more passive than active, in that it is a negative filter around doing no (or less) harm. So, these are people that want to invest and make money, but don’t want to trash the environment or invest in big tobacco or something like that. Impact investment, is newer and has a positive agenda around creating impact for which a premium is paid either in risk or lower ROI. A good distinction to know. Now, how you would parse the difference between altruism and morality between those two is probably a bit more complicated.


  1. Industry News Round Up: 3 August — Nexii - August 3, 2012

    […] Aaron Ausland of Staying for Tea questions the motivations of impact investors in his article, The Trouble With Impact Investor’s Brains […]

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