You are investing in the capital market and want to maximize your investment return. You find out that with 100% certainty, company A’s stock will perform better than company B’s stock, giving you higher returns to the same level of risk. Which company would you choose to invest in? A good guess would probably be that you chose to invest in company A, given the higher risk-adjusted return. That would be the rational investment choice, a choice where you do not involve feelings and emotions in the investment decision. But what if you were told that company A was a producer of tobacco or alcohol, profiting on products which can lead to addictive behavior for consumers, whereas, company B was known for its social responsibility. Would you still invest rationally?
The answer to this question depends on your own personal values, what you find most important, and most certainly also the norms of the society you live in. Some will be furious knowing that others might even consider investing in company A, while some investors will continue to act entirely rational. Maybe the investor starts to weigh in how much more return one can expect from investing in company A, and thus if it would be worth being sinful due to a larger return. Or the investor looks at the potential opportunity cost related to investing socially responsible.
Based on the title of his article, Milton Friedman would probably argue that “The social responsibility of Business is to increase its profit” (Friedman, 1970). Consequently, he would most certainly invest rationally in the above example. However, strong opinions could be formed against Mr. Friedman, as the combination of ethics and investments is a tricky one. This thesis will provide you with information on the historical performance of American companies in four industries often associated with sin. Maybe this can help you in your evaluation of whether sin stocks should have a place in your portfolio or not.
1.1 Choice of Subject
Within business administration we use theoretical models to explain reality. The models are often based on assumptions and predictions, and can therefore be perceived as rigid and static. The financial theories around the capital markets and investments are no different. Models can be based on investors behaving rationally or that the market pricing is perfect. But reality is in fact so much more, reality is colorful and warm, filled with emotions.
During the course of our education at Umeå School of Business and Economics, we have found finance interesting and chosen to specialize ourselves within the subject. But when studying these financial models, it is easy to forget about the emotional reality they represent. Further, we believe that the most interesting discussions arise where opinions in society clearly differs. Therefore we have searched for a financial topic which is heavily influenced by societal- and personal values. Ethical considerations within investments, is an example of just that. Shunning investments in vice is a consequence of these ethical considerations. But how do the shunned stocks perform? Depending on the answer to this question, an interesting debate between two opinions might occur.
Our goal is not to persuade anyone into investing either socially responsible or in vice. Our goal is to present the facts on the historical performance of vice investments. Whether you will act on the information we provide you with, is entirely up to you, based on your personal values. We hope that you will enjoy reading this thesis and that it will add some emotions to the world of finance.
See Full PDF here: The Historical Performance Of Vice Investments