Another exercise in stating the blindingly obvious

Traditionally, academics from the University of Chicago have been staunch advocates of efficient markets and rational behaviour. Meanwhile, New York University had a more behaviouralist or at least more Keynesian reputation in the saltwater vs. sweet water debates of days gone by.

Of course, these stances have become clichés since faculty have changed and both universities now have faculty that works on behavioural and neoclassical topics. But it is still funny what happens when you put two researchers from Chicago together with two researchers from NYU to examine how everyday consumers use firm disclosures like financial reports and ESG reports. Turns out they use it just the way you would expect: not at all. And the resulting academic research paper becomes an exercise in stating the blindingly obvious.

The researchers bothered 24,000 US households in a large-scale field experiment to check if consumers prefer to buy from companies with better ESG credentials or companies that are profitable as opposed to loss-making.

Now, one of the key steps before designing an experiment is to think about how normal people behave in real life and then formulate some hypothesis. And I don’t know about you but except for weirdos like me who are totally into investing as a hobby or profession, I have never seen anyone read a financial report or an ESG report of a company. The very idea seems so preposterous to me that I wonder how anyone could have missed that before sending out questionnaires to tens of thousands of unsuspecting Americans.

Yet, here is what people say drives their decision to buy certain goods.

Purchase considerations by US consumers

Source: Leonelli et al. (2024)

Guess what, product price and quality are the only things that matter. And here are the information sources consumers use to inform their choices.

Information sources used to make product purchase decisions

Source: Leonelli et al. (2024)

Less than 10% mention that they look at ESG reports or financial reports, which I guess is simply the share of people who checked every possible answer because they didn’t pay attention to the survey plus the few weirdos that have investing as a hobby or profession.

This led the researchers to conclude as one of their four main findings that consumers “rarely consult ESG reports and virtually never use financial reports to inform their purchase decisions”.

Consumers do have a slight preference to buy goods from companies with better environmental or social credentials but don’t care whether a company is profitable or not when deciding to buy their products.

However, the researchers admit that ESG reports only have an effect on consumers who have been prompted to actually read them, but these effects are small and short-lived. Asked a little later why consumers didn’t give a damn about the ESG credentials or profitability anymore, their number one answer was that they couldn’t remember what the ESG credentials or profitability of a company was.

Frictions in using information from experiment

Source: Leonelli et al. (2024)

To conclude then, four researchers from two elite universities investigated whether consumers consult ESG reports or financial reports to make purchase decisions. They found that they didn’t but when forced to read those exciting reports they preferred to buy stuff from companies with better ESG credentials but only for a while. After that, they simply couldn’t remember anymore.

I think we need to book these guys a flight to Stockholm for the next Nobel Prize ceremony. It’s a shoe-in.