From Self Interest to Shared Interest: The Logic of Impact Investing

The standard model of economic behaviour starts with a deceptively simple assumption: people act in their own interest. From this one seed, an entire architecture of markets, prices, and efficiency grows. Adam Smith’s great insight was that private selfishness, channelled through competition, could produce public good. The butcher and the baker serve us not out of kindness but self-regard, and yet we are fed.

But taken too literally, this framing leads somewhere thin and unsatisfying. It describes a world of strangers who transact once and walk away. A world of single-shot games.

In a single-shot game, your counterparty’s interests are irrelevant to your strategy. In a constant-sum game, they are worse: they are opposed. What you gain, they lose.

Life, however, is not a single-shot game. Business relationships recur. Reputations compound. Communities persist across decades. The moment you introduce repetition, the whole calculus shifts. Life is symbiosis.

In repeated games, your counterparty’s interests start to matter, not as some moral concession but as a logically strategic one. Cooperation that would be irrational in a single encounter becomes entirely rational across a long enough horizon. This is what the Folk Theorem tells us: given sufficient patience, cooperative outcomes can be sustained. Go look up Folk Theorems and Prisoner’s Dilemma.

There is something beyond strategic patience at work in human cooperation. Game theory in its classical form treats each player as an opaque utility maximiser. Real human behaviour adds the possibility that we are not opaque to one another, and that our interests are not as independent as the model assumes. Go look up the game of dividing the dollar.

Adam Smith understood this before the formal mathematics existed to describe it. The Theory of Moral Sentiments, which he wrote before the Wealth of Nations and which forms its basis, is an investigation into exactly this: how social creatures come to share in each other’s experience. Two things matter here.

The first is empathy, which in its cognitive sense is the capacity to genuinely model another person’s state of mind, beliefs, and situation. The empathic player does not merely observe the other; they inhabit the other’s perspective well enough to anticipate it. This is not sentimental but logical, as it aids convergence to agreement and transaction.

The second is sympathy, which runs deeper: the positive interdependence of what we actually care about. The sympathetic person does not just model another’s welfare; they share in it. Their own satisfaction is partly made up of the flourishing of those around them.

Together, these two capacities explain how the behavioural foundations of the Wealth of Nations are actually met. Markets work not because people are purely self-interested, but because self-interest is embedded in a web of social feeling that makes the relevant games long and non-zero-sum.

So what does any of this mean for investing?

It means the conventional framing, which treats commercial investing and impact investing as philosophically distinct activities, is a bit weak. The narrowly conceived commercial investor is playing a single-shot game in a constant-sum world. The impact investor is someone who has understood that the real game is repeated, that it is not constant-sum, and that the returns worth caring about extend well beyond the financial.

This is not altruism as self-sacrifice. It is enlightened self-interest.

The person who subordinates narrow personal interest to the interests of the collective is not abandoning self-interest. They are recognising that their interests, properly understood, are bound up with the system they inhabit. A family that depletes the social and environmental commons from which it draws its wealth is engaged in a slow act of self-destruction, however healthy the quarterly returns look in the meantime.

When impact investments yield below market returns, something real has happened. The shortfall is not a loss to be explained away. It is the price paid for other return streams: environmental stability, social cohesion, the health of the communities and ecosystems the portfolio depends on. These are returns. They are less legible than an IRR, but they are no less real, and across a genuinely long horizon, they may matter more than anything else.

Multiple return streams, held together, are what serious long-run investing actually looks like. Financial returns are one stream. Environmental returns are another. Social harmony, institutional trust, and the preservation of conditions in which future generations can do well are others still. The work is to hold all of these in view at once, to make trade-offs consciously, and to resist the temptation to collapse a genuinely rich problem into a single number.