If you a make a list of financial theorists who have 1) taken a long-term interest in social investing, 2) published numerous studies of SRI in refereed journals, and 3) engaged social investors constructively about their work, you basically get one name: Meir Statman.
Since he won the Honorable Mention in this year's Moskowitz Prize competition and headlined the Journal of Investing special SRI issue with a different article, I thought I'd provide a little additional background on him and his work. Here are his studies that bear directly on SRI:
- Doing Well While Doing Good?, Financial Analysts Journal, 1993
- Socially Responsible Mutual Funds, Financial Analysts Journal, 2000
- The Religions of Social Responsibility, Journal of Investing, 2005
- Socially Responsible Indexes: Composition and Performance, forthcoming, 2005
I first ran across Meir's work when I was studying the diversification impact of social screens in the late 1980s and early 90s. In those days conventional wisdom held that 30 stocks should be enough to adequately diversify a portfolio. But in 1987 Meir's "How Many Stocks Make a Diversified Portfolio" showed that the number was much higher, possibly in the hundreds.
I figured that finding was good for a social index - it strongly suggested that broad indexes could offer a risk advantage over more concentrated portfolios. But it was also a cautionary note for social investors who were counting on the "Rule of 30" to protect them from diversification costs introduced by the social screens. It convinced me that social investors needed to be really careful about diversification, a conviction I still hold today. (A brief abstract of this study appears at sristudies.org.)
Meir's best-recognized work is not in the SRI field, however. He is regarded as one of the pioneers of Behavioral Finance, and his most-cited work is a Journal of Finance article, about the tendency of investors to sell winners too soon and hold losers too long. The full citation for Shefrin and Statman (1985) can be found here.
Social investors should take careful note of Meir's work, because many of his papers go well beyond the bounds of traditional finance and raise questions about the interplay of markets and human psychology. I am thinking particularly of his paper on fair trading, which has ethical and moral significance well beyond its contribution to the financial literature.
I asked Meir which of his writings he thought newcomers should look at, and he suggested "Normal Investors, Then and Now", which recently appeared in Financial Analysts Journal. There is a good interview with him here.
Meir has made a serious study of social investors. Social investors would be wise to return the favor.