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PolicyResearchWorkingPaper10459

ThePowerofReligion

IslamicInvestingintheLab

SheheryarBanuri

LuciaMilenaMurgia

ImtiazUlHaq

InternationalFinanceCorporation

May2023

ProducedbytheResearchSupportTeam

PolicyResearchWorkingPaper10459

Abstract

comparestheextenttowhichinvestorswithreligiouspref-erencesarelikelytoacceptinferiorfinancialperformancetopursueinvestmentsalignedwiththeirreligiouspreferences.ThefindingsshowthatinvestmentinanIslamicfundisdrivenbyreligiouspreferencesandreligiosityisstronglytiedtoinvestorloyaltyintheIslamicfund,withinvestorsmorewillingtoacceptreductionsinreturnsandincreasesinrisk.Theanalysisfailstofindthatsocialpreferencesplayasimilarroleinsociallyresponsiblefunds.Whenpitteddirectlyagainsteachother,investorspreferreligiousinvest-mentsoversociallyresponsibleinvestments,suggestingthattheydonotviewthetwoassubstitutes.

Faith-basedmutualfundshaverecentlybecomeagrowing

cornerofthemutualfundindustry.Moralityandethicsare

thoughttoexertaninfluenceoninvestors’decisionsinthis

segment,althoughtheirroleindrivingsuchinvestments

isnotclearasthesefundsarealsoattractiveduetotheir

distinctrisk-returnprofile.Ifnonpecuniarymotivesare

predominant,investorsinsuchfundsmaybelesssensitive

tofinancialperformance,resultingindifferentpatternsof

fundflowsrelativetoconventionalfunds.Thispaperfills

thegapintheliterature,byprovidinganexpresslinkage

betweenreligiouspreferencesandinvestmentinanIslamic

fund.Usinganincentivizedlabexperiment,theanalysis

ThispaperisaproductofthetheEconomicPolicyResearchDepartment,InternationalFinanceCorporation.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebat/prwp.Theauthorsmaybecontactedatiulhaq@.

ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.

ThePowerofReligion:IslamicInvestingintheLab1

SheheryarBanuri2,LuciaMilenaMurgia3,ImtiazUlHaq4

Keywords:Islamicinvestment,experimentalmethods,information,investorbehavior,mutualfunds

JELcodes:G23,C91,Z12

1WewouldliketothankRazaHashmi,andparticipantsoftheCentreforBehaviouralandExperimentalEconomicsseminarseries,EasternArcannualmeetingandExperimentalFinanceAsia-Pacificregionalmeeting.ThestudywasfundedthroughgrantsfromtheLahoreUniversityofManagementSciences.EthicalapprovalforthestudywasgrantedbytheLahoreUniversityofManagementSciencesIRB(LUMS-IRB/2016-05-06).

2Correspondingauthor:Sheheryar:

S.Banuri@uea.ac.uk

,SchoolofEconomics,UniversityofEastAngliaandCentreforBehaviouralandExperimentalSocialScience(CBESS).Norwich,UK.

3Lucia:

L.Murgia@uea.ac.uk

,NorwichBusinessSchool,UniversityofEastAngliaandCentreforBehaviouralandExperimentalSocialScience(CBESS).Norwich,UK.

4Imtiaz:

iulhaq@

,EconomicPolicyResearch,InternationalFinanceCorporation,WorldBankGroup.Washington,DC,UnitedStates.

1INTRODUCTION

Religiouslyaffiliatedmutualfundsarebecomingagrowingcorneroftheglobalmutualfundindustry.Islamicmutualfunds,apopulartypeofreligiousfund,reachedalmost$200billionofassetsundermanagementin2021,withpresencein29countriesacrosstheglobe.5Theyhavegrownatanannualizedrateof18%overthepastdecade,significantlyoutpacinggrowthofconventionalmutualfunds.IslamicfundsaregovernedbytherequirementsofShariah(Islamic)principleswhichrestricttheinvestableuniversebasedonpre-setcriteria.Specifically,thesefundsinvestincompaniesthatareinlinewithIslamicvalues.Thesefundsarenotallowedtoinvestincompaniesinvolvedintheuseofalcohol,gambling,tobacco,weaponsanddefense,etc.Furthermore,theyarerestrictedfrominvestingincompanieswithexcessivedebt.6

AdistinguishingfeatureofIslamicfundsandinvestmentsisthattheyhavehistoricallyexhibitedlowervolatilityinperformance,particularlyinturbulentperiods(Raoetal.,2015;PranataandNurzanah,2015;Alametal.,2016;amongothers).Asaresult,theyhaveperformedbetterthantheircounterpartsduringtimesofuncertainty,suchasduringthe2007-08financialcrisisandrecentCOVID-19shock(CallenandFang,2015;Rizvietal.,2015;AdhikariandAgrawal,2016;Khanetal.,2022).Thedecouplingoftheirperformancefromtheirconventionalcounterpartsduringsuchtimesmeansthattheycanserveasagoodvehiclefordiversificationinanyinvestmentportfolio.Forthisreason,Islamicfundshavebeentermedas“safehavens”(Hkirietal.2017;Mirzaetal.2022).

TheresilienceofIslamicfundsmakesthemattractivetoinvestorsingeneralandcanhelptoexplainthegrowthofthesegment.However,theremaybeotherattributesofIslamicfundsthatattractinvestors.Islamicmutualfundsaredifferentiatedbymorethanjusttheirperformance;theiralignmentwithIslamicvaluesmayappealtoMusliminvestorsfornonpecuniaryreasons.Ifso,wewouldexpectinvestorsinIslamicfundstobehavedifferentlyfromthoseinconventionalfunds.Asaresult,onewouldalsoobservedistinctfundflowpatternsinIslamicfundsversusotherfunds.Studyingthisissueisimportanttounderstandingfaith-basedfundmarkets,astheymaybedefinednotonlybydistinctholdingsbutalsouniquedemandforces.

Toexplorethis,weaskthequestion:whatroledoreligiouspreferencesofinvestorsplayindrivinginvestmentstofaith-basedfunds?Thereisscantevidenceonthisfront,asaddressingthisquestiondirectlyischallenginginobservationalsettingsduetothedifficultyincapturinginvestorpreferences.Thisstudyisthefirsttoadoptanexperimentalapproachtoprovidecausalevidenceontheimpactofreligiouspreferencesoninvestmentsinfaith-basedfunds.Thisfocusonmotivesforinvestinginfaith-basedfundsisnotdissimilartodisentanglingthemotiveforinvestinginsociallyresponsibleinvestments,whichhasbeenofparticularinteresttotheliteratureduetosimilardifferencesinperformanceandduetoprosocialpreferences.Barreda-Tarrazonaetal.(2011)arethefirsttousethelabtoexplorethemotivesbehindsociallyresponsibleinvesting.WefollowasimilarstrategytouncoverthemotivesforinvestinginIslamicfundsandprovidestrongevidencethatIslamicinvestingisdrivenbyreligiouspreferences.

Ourstudycanalsohelptoexplainwhyfaith-basedfundsfacelowervolatilityinfundflows,includinginperiodsofpoorperformance(Peifer,2011;Raoetal.,2015).IfreligiouspreferencesaretheprimarydriverofflowstoIslamicfunds,thenweexpectinvestorstobelesssensitivetofinancialperformance.Ourexperiment,designedtomeasurehowinvestorsreacttodecreasingperformance,findsthatmorereligiousinvestorsdoindeedtendtowithdrawlessfromIslamic

5GeneralCouncilforIslamicBanksandFinancialInstitutions(2022).

6ForadetaileddescriptionoftheinvestmentstrategyofIslamicfunds,seeKabir,Sirajo,&Paltrinieri(2019).

funds.However,theydonotexhibitsimilarde-sensitivitytopoorperformancewheninvestinginconventionalfunds.ThisprovidesevidencethatsuchinvestorstreatIslamicinvestmentsdifferentlyfromotherinvestments.Wealsoprovidefurtherevidencethatthisholdsevenwhensociallyresponsiblefundsareavailableasaninvestmentoption,suggestingthatinvestorsdonotviewIslamicandsociallyresponsiblefundsassubstitutes.

Sociallyresponsibleinvestments7haveattractedtheattentionofboththeacademicliterature,andalargeportionofthefinanceindustry(see,forexample,Cowton,1999;MacKenzie,1998;RocknessandWilliams,1988;Williams,1999;LewisandMacKenzie,2000;Barreda-Tarrazonaetal.,2011;HartzmarkandSussman,2019;amongothers).Theliteraturehasnotonlyfocusedontheinvestmentmetricsoftheassetclass,butalsoinvestormotives.8However,lesshasbeenwrittenaboutreligiouspreferencesandtheirimpactoninvestorbehavior.TheinfluenceofreligiononeconomicandfinancialattitudeshasbeenacknowledgedsincetheseminalworkofWeber(1930).Guisoetal.(2003;2006)andStulzandWilliamson(2003)identifyspecificeconomicandsocialattitudesassociatedwithreligion.Guisoetal.(2003)foundthattheintensityofreligiousbeliefsispositivelyassociatedwith“good”economicattitudes(definedasconducivetohigherpre-capitaincomeandgrowth).StulzandWilliamson(2003)findthatreligion(asaproxyforculture)predictscross-sectionalvariationincreditorrights.Moreover,religionisanevenbetterpredictorthanacountry’sopennesstointernationaltrade.Hence,religiontendstobeastrongmotivatoringeneral.

Morerecently,religionandeconomicattitudeshavebeeninvestigatedinthecontextoffinancialmarketsandcorporations.Theconsensusamongmanystudiesisthatreligiosityisnegativelycorrelatedwithrisk-taking,andthatbothreligiosityandriskaversionhaveaninfluenceinthecorporatesector(HilaryandHui,2009;Blau,2017),thebankingsector(AdhikariandAgrawal,2016),andeveninfluencethedecision-makingprocessofventurecapitalists(Chircopetal.,2020).Further,recentworkreportsapositivecorrelationbetweenreligiosityandinvestorloyalty(i.e.lowerfundflowsvolatility)inthemutualfundindustry(Peifer,2011;Raoetal.,2015).Takentogether,theseresultssuggestthatreligiousinvestorspreferfundswithlowerrisk,andarelesslikelytoswitchawayoncetheyundertakeaninvestmentdecision.Additionally,firmslocatedinareaswithhighlevelsofreligiosityarelesslikelytoexperiencefuturestockpricecrashes(CallenandFang,2015;Blau,2017;Chourou,2020).

Acommonfactoramongthesestudiesisthatreligiosityofcompaniesandfundmanagersareproxiedbythelevelofaveragereligiosityinthelocalgeographicalarea9(wheretheyhavetheirheadquarters).Specifictothemutualfundindustry,ex-posttransactionaldataareemployedintheanalysis.Thefindingsofthisliteraturearederivedwithsecondarydata,whichmakeitdifficulttodisentanglepecuniaryfromnon-pecuniarymotivesininvestorbehavior.

7Inthispaper,werefertosustainableinvestments,sociallyresponsibleinvestmentsorESGinvestmentsassynonyms,althoughweareawareofpotentialdifferencesamongthem.InthisrespectwetaketheapproachofHartzmarkandSussman(2019),whoemployESGratingsandESGfundstodiscusstheinterestofinvestorsinsustainableinvesting.

8Amongmany,theveryrecentworkofHartzmarkandSussman(2019)foundthatinvestorslargelyvaluesustainabilityusingtheintroductionoftheESGratingbyMorningstarin2016asanaturalexperimenttoinvestigateasymmetriesinthefundflowsofmutualfundwithdifferentESGratingscores.

9Otherstudiesthatexploretheinfluenceofreligiosityinbusinessrelatedcontextandinvestmentdecisionmakingprocessalsoemploysurveydata.See,forexample,Adeeletal.(2022),whoexploredtheroleofreligiosityinthecontextoffinancialreportingandauditorsjudgment.Anglinetal.(2022)examinetheroleofreligiositywithinmicrofinancecampaignsthroughafield-study.

Inthispaper,weadaptBarreda-Tarrazonaetal.’s(2011)design10toshedlightonmotivesbehindIslamicinvesting.WefindthatreligiouspreferencesareanimportantdriverofinvestmentinIslamicmutualfunds.TheevidenceforthiscomesfromanincentivizedlabexperimentconductedwithamajorityMuslimstudentsample(atauniversityinPakistan,aMuslimmajoritycountry).OuruseofthelaballowsustoperfectlycontrolfinancialmetricsofIslamicandnon-Islamicfunds,allowingustoisolatetheroleofreligiosityinIslamicinvestingandresponsivenesstodifferencesinperformanceandrisk.

Wefillagapintheliteraturebyprovidingevidenceofanexpresslinkagebetweenreligiouspreferences(asmeasuredbyanincentivizeddictatorgame)andreligiouslymotivatedinvestments.Weusethelabtomeasurebehaviorinasituationwheresubjectssplittheirinvestmentbetweenpairsoffunds:a“traditional”mutualfundthatgeneratesprofitsfortheinvestor,andan“Islamic”fund,identicalineverywayexceptforthelabel,andasmall(1%ofprofits)matcheddonation11toanIslamicinstitute(alocalmosque)–simulatingtargetedbenefitsgeneratedfrominvesting.Subjectsmakemultipledecisions,whichvaryreturnsandriskforoneofthetwofunds,simulatingthetrade-offbetweenfundperformanceandfundmission.ThisapproachsimulatesinvestmentbehaviorandallowsustoidentifytheroleofriskandreligiouspreferencesinIslamicinvestmentdecisions.Ourlabexperimentovercomesidentificationissuesbyfocusingonpairedchoicesbetweenthesetwotypesofmutualfunds.Inadditiontothese,wefurtherintroduceathird,sociallyresponsible,mutualfundwhichoperatesthesamewayastheIslamicfundbutgeneratesasmalldonationtoalocalcharity(TheCitizensFoundation).12

Themainexperimentconsistsofabaselineandtwotreatments:Inthebaseline,subjectsareintroducedtotwotypesof(traditional)mutualfunds.Subjectsareprovidedwitha5,000tokeninvestment(worth4,166PKR,40USD)andareaskedtomakeaseriesofinvestmentdecisions.Subjectschoosehowtosplittheinvestmentbetweenthetwomutualfunds.Thefirsttreatmentvariesthelabelononeofthetraditionalfunds(labelled“Islamic”toprovidesubjectstherightcontext),andaddsasmall,matcheddonation:1%oftheprofitsearnedbythesubjectarematchedbytheexperimentersanddonatedtothelocalmosque.13Thesecondtreatmentconnectstotheliteratureonsociallyresponsibleinvesting,byreplacingtheIslamiccharity(thelocalmosque)withanon-secularcharity.OursubjectsarestudentsattheLahoreUniversityofManagementSciences(LUMS)inLahore,Pakistan,ahighereducationinstitution.Tomeasurereligiousandsocialpreferences,weusemodifieddictatorgameswithcharityrecipients.Wemeasureriskpreferencesusinghypotheticalchoicesbetweenasurepaymentanda50-50gamble,withdecisionsvaryingtheamountofthesurepayment(seeCharnessetal.,2013foranexcellentreviewonelicitingriskpreferences).

WefindthatinvestmentintheIslamicfundisdrivenbyreligiouspreferences,withinvestorswillingtotakegreaterreductionsinreturns(andincreasesinrisk)forthesakeofinvestinginfundsthatalignwiththeirbeliefs.Wedonotfindevidencethatreligiousinvestorsareingenerallesssensitivetofinancialperformancewheninvestinginconventionalfunds.Furthertreatmentsimplementasociallyresponsiblefund(alaBarreda-Tarrazonaetal.,2011),andfindasimilar

10Unliketheirsetup,wedonotuserealmutualfundstogenerateoneofourdecisions,butimplementalabversionofmutualfunds,whichallowsustodirectlycontrolfundparameters(riskandreturns).Inthismanner,weareabletoexertgreatercontroloverthedecisionenvironment,thoughwecannotclaimtherealismthattheyimplementintheirexperiment.

11Importantly,thedonationismatchedbytheexperimenters,suchthattheactualprofitstothesubjectfromthetraditionalandIslamicfundsareidentical.Theinstructionsmakethisfeaturecleartothesubjectssoastoavoidanyconfusion.

12Formoreinformationaboutthefoundation,pleasesee:

.pk/.

13Thedonationdoesnotaffectsubjectearningsanydifferentlytothatinthebaseline.Hence,differencesininvestmentbetweentreatmentandcontrolcanbedirectlyattributedtotheusageoftheIslamicfund.

patternofinvestment,indicatingthatIslamicinvestingandsociallyresponsibleinvestingaredriven(atleastinpart)byconsiderationsotherthanfundperformance.However,wefailtofindevidencethatinvestorsviewsociallyresponsiblefundsassubstitutesforIslamicfunds,withreligiousinvestorschoosingtoinvesthigheramountsinIslamicfundsevenwhenthealternativefundissociallyresponsible.

Ourresultsprovideclearevidenceforreligiouslymotivatedinvesting.Tothebestofourknowledge,oursisthefirststudythataimstoassessthenon-pecuniarymotivationsbehindreligiousinvestmentsthroughalabexperiment.Ourstudycontributestoliteratureontheroleofnon-financialinformationininvestmentdecisions,investorloyaltyandfaith-basedinvesting.Ourfindingsholdimportantimplicationsforagrowingsegmentofthemutualfundindustry,particularlyinvestmentpatternsandcommunicationstrategies.

Therestofthepaperisorganizedasfollows:Section2outlinesthedesignofthelabexperiment;Section3presentstheresults;Section4discussesthefindings;andSection5concludesthepaper.

2EXPERIMENTALDESIGN

Ourexperimentutilizesabetween-subjectsdesign,withacontrolgroupandthreetreatmentgroups.OursampleconsistsofuniversityundergraduatestudentsataprivateuniversityinPakistan–theLahoreUniversityofManagementSciences.StudentsatthisuniversitygenerallybelongtothemidtoupperincomelevelsofPakistanisociety.Thissampleisidealforourpurposes,asPakistanhasthesecondlargestpopulationofMuslimsintheworld(followingIndonesia)andhasahighproportionofMuslims(96.5%accordingtothe2017census).Furthermore,thesampleiswell-educatedandlikelytobehighearnersinthefuture(duetostrongemploymentprospectsoftheuniversity’sgraduates),andhencearelikelytoengagewiththefinancialservicessector,includingasinvestors.Hence,conductingastudyonIslamicinvestingisidealwiththissample.Inadditiontothis,Pakistanisamiddle-incomecountry,andhasarobustsocialservicesandnon-governmentalorganizationssector,indicatingthatsociallyresponsibleinvestingmayalsobeofinteresttothepopulation(ingeneral),andtooursample(inparticular).Pakistanisvaryintheiradherencetoreligiousdoctrine,whichisusefulforstudyingdemandforIslamicfinancialinstruments.Collegestudentsfromaprivateuniversityareauseful(thoughnon-representative)sample,astheyarelikelytobeinvestinginmutualfundsinthefuture.AllsessionsfortheexperimentwereconductedinApril2017.Sessionslastedbetween45minutesto1hour,andaverageearningspaidtosubjectswereapproximately850PKR(8.5USD).Sessionswereconductedinon-campuscomputerlabsattheLahoreUniversityofManagementSciences.Subjectswererandomizedtotreatmentattheirdesks,andallinstructionswerereadbythesubjectsthemselves.

OurexperimentaldesignfollowscloselytheworkofBarreda-Tarrazonaetal.(2011),howeverwedepartfromtheirsetupinafewspecificways.Barreda-Tarrazonaetal.(2011)providesubjectswitharealisticdocumentofatraditionalmutualfundandan“ethicalfund”.Theoverviewthattheyprovideincludesdetailedinformationrelatedtothefunds(e.g.,pastperformance,investmentstyleandassetscomposition).Incontrast,oursimplifiedsetupjustprovidesthreepiecesofinformation:averagereturn,risk,andfundtype(traditional,Islamic,orsociallyresponsible).Wefollowthisapproachtohighlightkeydifferencesbetweenthefundsinasimpleandintuitivemanner.

Inwhatfollows,wedetailoutthebaselinecondition,followedbytheIslamicmutualfundtreatmentandthesociallyresponsiblefundtreatment.Wethendiscussourthirdandfinaltreatment,wherethetwofundsaresociallyresponsibleandIslamic.

Experimentstructure

Acrossalltreatments,subjectsundertake24investmentdecisionsintotal.Ineachdecision,subjectsmustdecidehowtosplitafixedendowmentof5,000tokens(4,166PKR,40USD)betweentwomutualfunds,labelledfundXandfundY.Thebaselineandtreatmentsvarythetypeoffundsavailable.Subjectsaregiventhreepiecesofinformationabouteachfund:theaveragereturn,therisklevel(thestandarddeviationofreturns),andthetypeoffund(traditional,Islamic,orsociallyresponsible).

Acrossallconditions,fundXalwayshasafixedreturnsetat12%,andarisklevelof20.FundY’sriskandreturnlevelschangebasedonthedecision.Table1belowdisplaysasummaryoftheriskandreturnforeachdecision.Forexample,inthefirstdecisionthatsubjectsface,theydecidehowtoallocatetheirendowmentbetweenfundXwhichcarriesareturnof12%andarisklevelof20,andfundYwhichcarriesareturnof13%andarisklevelof20.NotethatthereturnstofundYreduceby0.5%foreachsubsequentdecision,buttherisklevelremainsfixed.Afterthefirst12decisions,subjectsaregivenarefresherontheinstructionsandthenaskedtoallocatetheendowmentbetweenthetwofundsagain.However,thistimetherisklevelforfundYissetat19,whilethereturnisthesameasfundX(12%).Fortheremainingdecisions,fundY’srisklevelincreasesby0.5.Eachofourcontrolandtreatmentsfollowthisexactstructure,andtheorderofthesedecisionsisfixed.

Table1:Investmentdecisions

Decision#

MutualFund

X

ReturnRisk

MutualFund

Y

ReturnRisk

PhaseI:Decliningreturns(fundY)

1

2

3

4

5

6

7

8

9

10

11

12

12

12

12

12

12

12

12

12

12

12

12

12

20

20

20

20

20

20

20

20

20

20

20

20

13.0

12.5

12.0

11.5

11.0

10.5

10.0

9.5

9.0

8.5

8.0

7.5

20

20

20

20

20

20

20

20

20

20

20

20

PhaseII:

Increasingrisk

(fundY)

13

14

15

16

17

18

19

20

21

22

23

24

12

12

12

12

12

12

12

12

12

12

12

12

20

20

20

20

20

20

20

20

20

20

20

20

12

12

12

12

12

12

12

12

12

12

12

12

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

23.0

23.5

24.0

24.5

Subjectsareinformedthattheymustinvestall5,000tokensbutcansplitthembetweenthetwofundshowevertheywish.FollowingBarreda-Tarrazonaetal.(2011),subjectearningsarebasedontheamountinvestedineachfund,andthedecisionnumber(whichcontrolstheriskandreturnslevelsofeachfund).Onedecisionisrandomlyselectedtobepaid;theearningsfrominvestingineachfundforthisdecisionisgeneratedacrossanormaldistributionwithassociatedexpectedreturnandrisk(i.e.,standarddeviation)levels.ThereturndistributionsforFundXandYareindependent,asarethoseacrossdecisions(subjectsareinformedofthis).

Theinstructionswalksubjectsthroughthefundamentalsofinvesting,includinginformationonwhatreturnsare,whatriskis,whatmutualfundsare,andthedifferenttypesofmutualfundsavailable.Subjectsarealsowalkedthroughearningscalculationstoensurethatthereisabaselevelofunderstanding.Thiswayweensurethatthosewithnounderstandingoffinancehaveatleastabaselinelevelofworkingknowledge.

ItisimportanttonotethatfundXisfixedacrosstheentireexperimentatareturnof12%andariskof20.TheinitialvalueswereselectedbasedonthehistoricalperformanceoftheKarachiStockExchange(KSE-100)Index,whichactsastheprimarybenchmarkfortheperformanceofthemainstockmarketinPakistan.ThismeansthattheactualreturnoffundXisdeterminedby

theaveragereturnandtherisklevel(withmeanof12andastandarddeviationof20).FormutualfundY,thereturnsrangefrom13%to7.5%,andriskrangesfrom19to24.5.FundYdropsinperformance(linearly)foreachsetofdecisions.Weimplementthis(asdoBarreda-Tarrazonaetal.,2011)totestforsensitivitytoreturnsandrisk.

Thetreatmentsvarythetypeoffundavailabletooursubjects.Theexperimenthasthreetypesoffunds:atraditionalfund,an“Islamic”fund,andasociallyresponsiblefund.Thetraditionalfundworksexactlyasdescribed:theprofitsfrominvestinginthefundaregeneratedacrossanormaldistributionwithassociatedexpectedreturnof12%andastandarddeviationof20.Further,notethatreturnsfromthetwofundsaredrawnindependently(again,subjectsareawareofthis).

The“Islamic”funddiffersfromthetraditionalfundintwoways.First,thefundislabelledas“Islamic”intheinstructions.Second,investmentinthefundgeneratestargetedsocialgoods:Subjectsareinformedthat1%oftheprofitswillbematchedbytheexperimentersanddonatedtoalocalmosque.Itisimportanttonotethatthedonationtothemosquedoesnotcomefromtheprofitsofthesubjectsbutismatched.Inthisway,fromarationalperspective,Islamicandtraditionalfundswiththesamerisk-returnlevelsareidentical.Subjectsaregiveninformationaboutthemosqueinquestion,whichwasalocalmosqueoncampusfrequentedbymanyofthestudentbody.Subjectswereaskedtoreadthefollowingparagraphtofamiliarizethemselveswiththemosqueinquestion:

“TheLUMSmosquestarteditsoperationsin2002.ItisthehubforIslamicreligiousactivitiesandprayersontheuniversitycampus.Themosqueisacommunityfacilitythatisopen24hoursaday.Thespaciousmosqueoffersseparateprayerfacilitiesformenandwomen.Themosqueisseekingdonationsasitaimstoraisefundsforadditionalprayermats,Quransandair-conditioningunits.”

Finally,thesociallyresponsiblefunddiffersfromthe