Maslowian Portfolio Theory
Encyclopedia
Maslowian Portfolio Theory (MaPT) creates a normative portfolio theory based on human needs as described by Abraham Maslow
. It is in general agreement with behavioral portfolio theory
, and is explained in Maslowian Portfolio Theory: An alternative formulation of the Behavioural Portfolio Theory, and was first observed in Behavioural Finance and Decision Making in Financial Markets.
Maslowian Portfolio Theory is quite simple in its approach. It states that financial investments should follow human needs in the first place. All the rest is logic deduction. For each need level in Maslow's hierarchy of needs
, some investment goals can be identified, and those are the constituents of the overall portfolio.
(Markowitz), where investors put all their assets in one portfolio, here investors have different portfolios for different goals. BPT starts from framing and hence concludes that portfolios are fragmented, and built up as layers. This indeed seems to be how humans construct portfolios. MaPT starts from the human needs as described by Maslow and uses these needs levels to create a portfolio theory.
The predicted portfolios in both BPT and MaPT are very similar:
One will notice that the main differences between MaPT and BPT are that:
is a good basis for portfolio selection, of course, including all generalizations developed later.
Abraham Maslow
Abraham Harold Maslow was an American professor of psychology at Brandeis University, Brooklyn College, New School for Social Research and Columbia University who created Maslow's hierarchy of needs...
. It is in general agreement with behavioral portfolio theory
Behavioral portfolio theory
Behavioral portfolio theory was published by Shefrin and Statman. This theory essentially tries to provide a contrast to the fact that the ultimate motivation for investors is the maximization of the value of their portfolios...
, and is explained in Maslowian Portfolio Theory: An alternative formulation of the Behavioural Portfolio Theory, and was first observed in Behavioural Finance and Decision Making in Financial Markets.
Maslowian Portfolio Theory is quite simple in its approach. It states that financial investments should follow human needs in the first place. All the rest is logic deduction. For each need level in Maslow's hierarchy of needs
Maslow's hierarchy of needs
Maslow's hierarchy of needs is a theory in psychology, proposed by Abraham Maslow in his 1943 paper A Theory of Human Motivation. Maslow subsequently extended the idea to include his observations of humans' innate curiosity...
, some investment goals can be identified, and those are the constituents of the overall portfolio.
Comparison with behavioral portfolio theory
Behavioral Portfolio Theory (BPT) as introduced by Statman and Sheffrin in 2001, is characterized by a portfolio that is fragmented. Unlike the rational theories, such as Modern Portfolio TheoryModern portfolio theory
Modern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...
(Markowitz), where investors put all their assets in one portfolio, here investors have different portfolios for different goals. BPT starts from framing and hence concludes that portfolios are fragmented, and built up as layers. This indeed seems to be how humans construct portfolios. MaPT starts from the human needs as described by Maslow and uses these needs levels to create a portfolio theory.
The predicted portfolios in both BPT and MaPT are very similar:
- In BPT: Safety Layer, corresponds to the Physiological and Safety Needs in MaPT
- Specific Layer in BPT are the Love Needs and the Esteem Needs in MaPT
- Shot at Richness in BPT is the Self Actualization level in MaPT
One will notice that the main differences between MaPT and BPT are that:
- MaPT is derived from human needs, so it is to some extent a normative theory. BPT is strictly a descriptive theory.
- MaPT generates from the start more levels and more specific language to interact with the investor; however, theoretically BPT allows for the same portfolios.
Portoflio optimization
Generally it seems that Roy's safety-first criterionRoy's safety-first criterion
Roy's safety-first criterion is a risk management technique that allows an investor to select one portfolio rather than another based on the criterion that the probability of the portfolio's return falling below a minimum desired threshold is minimized....
is a good basis for portfolio selection, of course, including all generalizations developed later.