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This chapter fo-cuses on building a portfolio extending beyond purely financial returns. The main differences between building a portfolio for traditional and sustainable investors concern their goals and how to achieve them. Traditional investors want to realize an expected level of return while minimizing risk. Their goal is financial. By contrast, sustainable investors seek both financial and non-financial returns. Sustainable investors look at ESG factors, along with financial analy-sis. Because their goals differ, how they achieve them also varies. Although the same asset clas-ses are generally available to both investor types, not all investments within each category are necessarily sustainable. Therefore, those interested in sustainable investing have fewer choices within each asset class than traditional investors. Sustainable investments may represent a core part of a portfolio or a satellite component, depending on the investor. This chapter highlights several portfolio topics, including asset allocation, diversification, and rebalancing.

Personal values are the basis of sustainable investing. Such values can differ in focus and conviction. Many people derive their values from their strong beliefs stemming from religion, political association, and patriotism. They can target topics like social values, civil rights, and climate change. Various re-ligions, including Catholicism, Judaism, Islam, and Mormonism, have different values and thus offer diverse investment guidance. Similarly, different political ideologies lead to other invest-ment objectives. This chapter helps sustainable investors reflect on their own beliefs, under-stand the conflicts between value-based systems, and align their investment strategy with their beliefs. Many stock indices, mutual funds, and ETFs follow various values-based strategies to help investors satisfy their sustainability criteria.

This chapter pro-vides a modern view of a company’s responsibilities and obligations. Many companies have vast amounts of wealth and the power to make positive societal changes. Many businesses actively advocate against social injustice, pollution, and climate change. A company can support these activities by changing its supply chains, manufacturing processes, and hiring practices. Firms can also be socially responsible by making charitable donations, engaging in community projects, and enabling employees to donate and volunteer. Corporate social respon-sibility (CSR) starts with business ethics and how a company views its various stakeholders, like stockholders, employees, customers, the community, and the environment. This chapter de-scribes firms’ socially responsible activities and helps sustainable investors assess inevi-table trade-offs and inconsistencies that arise. For example, a firm may appear socially responsi-ble but not environmentally responsible.

Deciding how to invest money can be complicated. For traditional investors, the primary criterion is profitability. However, the process becomes more challenging for sustainable investors because they add an-other layer of complexity by integrating personal values and societal issues into investment deci-sion-making. In addition, these investors have many methods available to help them meet their goals. These approaches include screening, ESG integration, socially responsible investing, shareholder engagement and activism, thematic investing, and impact investing. As a result, no “one size fits all” approach is available for sustainable investing. Many vehi-cles are also available to help sustainable investors align values with investments, such as stocks, bonds, mutual funds, and ETFs. In summary, this chapter helps sustainable investors sort through various investment approaches and choices that provide more than just a financial re-turn.

This chapter in-vestigates the financial and social performance of sustainable investing and discusses specific da-ta concerns for measuring performance. The bulk of the chapter examines the financial perfor-mance of sustainable investing compared to traditional investing for different strategies and as-set classes, including equity funds, index funds, fixed-income funds, and even funds focused on “sin” stocks. Overall, the evidence suggests that sustainable investing does not underperform traditional investing and may slightly outperform under certain circumstances. The chapter also explores the social performance of sustainable investing and whether it affects our society and planet. Most sustainable investors want a competitive financial return and an impactful social return. The chapter aims to provide an easy-to-digest menu of performance topics and let investors decide if they can have their cake and eat it too.

Sustainable in-vesting has changed considerably over time. Historically, many viewed it as a form of religious in-vesting that focused mainly on prohibiting “sinful” practices such as usury and excluding “sinful” investments through negative screening. Sustainable investing grew to incorporate a broader range of socially responsible values and practices, in-cluding “socially responsible” investments through positive screening. Sus-tainable investing has now evolved to include a wide array of different approaches that incorpo-rate various investment products and strategies. The most common method is integrating envi-ronmental, social, and governance (ESG) criteria into traditional investment models. Niche ap-proaches like green, impact, and community investing fall under sustainable investing. This chapter explores the evolution of sustainable investing and how it has become one of the most dominant trends in the current investment landscape.

How a situation or question is proposed can influence what people think of it. People react differently to “If you quit smoking, you will live longer” than to “If you don’t quit smoking, you will die sooner.” Although both statements provide the same information,...

People tend to be penny wise and pound foolish and cry over spilt milk, even though we are taught to do neither. Focusing on the present at the expense of the future and basing decisions on lost value are two mistakes common to decision-making that are particularly costly in the world of finance. Behavioral Finance: What Everyone Needs to KnowR provides an overview of common shortcuts and mistakes people make in managing their finances. It covers the common cognitive biases or errors that occur when people are collecting, processing, and interpreting information. These include emotional biases and the influence of social factors, from culture to the behavior of one’s peers. These effects vary during one’s life, reflecting differences in due to age, experience, and gender. Among the questions to be addressed are: How did the financial crisis of 2007-2008 spur understanding human behavior? What are market anomalies and how do they relate to behavioral biases? What role does overconfidence play in financial decision- making? And how does getting older affect risk tolerance?

Have you ever made an investment decision based on how you feel about a company, its products, or its leadership? If so, you may suffer from an emotional bias, which is a distortion in perception and decision-​making due to emotional factors. It...

Billionaire investor Warren Buffett is known for his pithy insights. He once observed that in finance “you don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” He also...

People are prone to errors and biases that influence their decision-​making. These mistakes can lead to bypassing rational thinking and relying on preconceived notions or intuition. Some biases are “hardwired” into the brain. Combining different behavioral biases can create a dangerous mixture that, if...

How investors behave can affect both their portfolio performance and the overall market. Because of a lack of formal training, limited experience, or personality traits, investors don’t always make decisions that are consistent with their stated financial goals. Their decisions often are impulsive and...

Are behavioral biases prevalent in commodities and futures markets? Although retail equity investors display many psychological biases, investors who are more sophisticated exhibit fewer biases. The market makers, traders (locals), speculators, hedgers, and institutions of the commodities and futures markets tend to be professional participants, and thus less prone to behavioral biases. Nevertheless, the fast-paced action of these markets is an environment that fosters behavioral errors. This chapter reviews the literature on the pervasiveness of prospect theory behavior and other biases in these markets. Strong evidence indicates that market participants exhibit loss aversion, the impact of reference points, the disposition effect, and overconfidence. They also engage in positive feedback trading and momentum investing. Lastly, the chapter reviews risk-taking and behavioral biases by the type of market participant, particularly focusing on market makers, floor traders, clearing members, and the public.

This chapter assesses the behavior of corporate managers and boards of directors within the framework of agency theory, stewardship theory, and psychological biases. In agency theory, a chief executive officer (CEO) is motivated to act in his or her own best interests rather than those of shareholders. Stewardship theory posits that a CEO is a self-actualizing individual seeking to grow and reach a higher level of achievement through leading an organization. A CEO exhibits self-interested behavior in managing the firm. The CEO also exhibits optimism, overconfidence, and risk-aversion behaviors that are not optimal for the company. In the context of agency theory, the board of directors should enact incentive structures and monitoring to control these behaviors. However, directors also suffer from self-interests and cognitive biases. Specifically, boards may suffer from group-dynamic problems such as social loafing, poor information sharing, and groupthink.