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Behavioral finance research has almost exclusively investigated the decision making of lay individuals, mostly ignoring more sophisticated institutional investors. The purpose of this paper is to better understand the relatively unexplored field of investment decisions made by pension fund trustees, an important subset of institutional investors, and identify future avenues of further exploration.

This paper starts by setting out the landscape in which pension fund trustees operate and make their decisions, followed by a literature review of the extant behavioral finance research applicable to similar situations.

Despite receiving training and accumulating experience in financial markets, these are limited and sparse; therefore, pension fund trustees are unlikely to be immune from behavioral biases. Trustees make decisions in groups, are heavily reliant on advice and make decisions on behalf of others. Research in those areas has uncovered many inefficiencies. It is still unknown how this specific context can affect the psychological effects on their decisions.

Given how much influence trustees’ decisions have on asset allocation and by extension in financial markets, this is a surprising state of affairs. Research in behavioral finance has had a marked influence on policy in the past and so we anticipate that exploring the decisions made within pension funds may have wide ramifications for the industry.

As far as the authors are aware, no behavioral research has empirically tested pension fund trustees’ decisions to investigate how the combination of group decisions, advice and surrogacy influence their decisions and, ultimately, the sustainability of our pensions.

The data were collected from a sample of 266 subjects comprising management students and practitioners in Sydney, Australia. The cognitive moral development stages of the subjects were examined using the defining issue test. Consistent with prior research, age, education, religious affiliation and religious commitment were found to have influenced moral judgement of the respondents. Vocation, gender and the firm ownership did not seem to influence the moral judgement levels. Students and practitioners demonstrated the same level of sensitivity to ethical dilemmas. A comparison of the data with similar findings in the USA revealed a marked difference between the Australian and the US subjects. Implication of the findings and directions for future research are discussed in the paper.

Rest posited that to behave morally, an individual must have performed at least four basic psychological processes: moral sensitivity; moral judgment; moral motivation; and moral character. Though much ethics research in accounting has been focused on component two, ethical judgment, less research has been undertaken on the other three components. The purpose of this study is to focus on component one, ethical sensitivity, of Rest's four‐component model.

A sample of 156 accounting undergraduates was employed to investigate the ethical sensitivity of accounting students and the effects of their ethical reasoning and personal factors on their ethical sensitivity.

Results of this study show that accounting students vary in their ability to detect the presence of ethical issues in a professional scenario. There is no significant relationship between accounting students' ethical sensitivity and their ethical reasoning (P‐score). Accounting students characterized as “internals” are more likely to show an ability to recognize ethical issues than those characterized as “externals.” The results also indicate that an accounting ethics intervention may have positive effect on accounting students' ethical sensitivity development. Hence, an individual who possesses the ability to determine what is ethically right or wrong (high ethical reasoning) may fail to behave ethically due to a deficiency in identifying ethical issues (low ethical sensitivity) in a situation.

Whilst much research has concentrated on ethical reasoning and ethics education to enhance the ethical conduct of accountants, it is important that the profession and researchers also direct their attention and efforts to cultivating the ethical sensitivity of accountants. The findings of this study provide additional evidence to support Rest's theory of a more comprehensive cognitive model of ethical decision‐making and suggest a more balanced research effort in evaluating the ethical development of individuals.