Why Convention Dominates Pension Fund Trustees' Investment Decision Making

Abstract

Pension funds may be one of the few avenues now open for financing new urban infrastructure and development projects. But convention dominates the investment decisions of pension fund trustees, so it is difficult to see how the ambitions of advocates of pension fund investment can be squared with trustees' behavior. The question is: why does convention dominate? Based upon previously reported interviews and case studies, this paper proposes a framework through which to understand the dominance of convention. In doing so, I emphasize the habits, rules and norms that structure decisions. This framework is inspired by the contributions of Kahneman and Tversky and their colleagues for understanding the psychology of individual decision making. The paper aims to be a realistic as opposed to an idealistic account of decision making, recognizing the ingrained and systematic nature of what some may term as non-rational decision making. The paper is also inspired by Keynes' work on risk and uncertainty. Using this framework, I assess the potential for investment innovation by pension fund trustees noting the importance of analogical reasoning in extending the range of pension funds' investments. The paper closes with a comparison of the proposed framework with standard treatments of decision making including reference to the robustness of psychological models of habit.

JEL Classification: G23, D81