An analysis of the use of guilt and shame by private investors as internal controls

Several studies have shown that psychological factors significantly impact people's economic decisions. Investors' sensitivity to psychological emotions, especially guilt and shame, can be utilized as a control tool in contract enforcement, an important challenge for private investors. Although these psychological factors are important, more research needs to be conducted on how private investors use them.

This research aims to investigate the use of psychological factors, including guilt and shame, as an internal control in the enforcement of contracts by investors in the private sector.

The measurement tool used in this study was a researchers-made questionnaire. A total of 300 investors in Fars province participated in the study. The data were analyzed using the latent class analysis method, including Vuong-Lo-Mendell-Rubin Likelihood Ratio, Lo-Mendell-Rubin Adjusted LRT, and Parametric Bootstrapped Likelihood Ratio Tests.

The result demonstrated that two classes can be identified in the sample (p<0.01). The result also revealed that 50.18% of the population belongs to the first group. This group uses the first-party mechanism relatively, with a probability of 90.4%, and does not use it at all, with a probability of 9.6%. The latter group accounts for 49.82% of the population as well. The first-party mechanism is not used at all by this group with a probability of 29.8%, while it is used relatively by 70.2%. Thus, investors in both groups endeavor to improve contract enforcement in their investments by paying attention to the severity and weakness of guilt and shame.

Since private sector investors extensively use guilt and shame, systems must be developed that can store and share the moral reputation of economic actors and their past transactions at the lowest cost.