Maslowian Portfolio Theory
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Maslowian portfolio theory (MaPT) creates a normative
portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificatio ...
based on human needs as described by
Abraham Maslow Abraham Harold Maslow (; April 1, 1908 – June 8, 1970) was an American psychologist who was best known for creating Maslow's hierarchy of needs, a theory of psychological health predicated on fulfilling innate human needs in priority, cul ...
. It is in general agreement with
behavioral portfolio theory Behavioral portfolio theory (BPT), put forth in 2000 by Shefrin and Statman,SHEFRIN, H., AND M. STATMAN (2000): "Behavioral Portfolio Theory," ''Journal of Financial and Quantitative Analysis'', 35(2), 127–151. provides an alternative to the assu ...
, 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 is an idea in psychology proposed by American psychologist Abraham Maslow in his 1943 paper "A Theory of Human Motivation" in the journal ''Psychological Review''. Maslow subsequently extended the idea to include his o ...
, 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 theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificatio ...
(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.


Portfolio optimization

Generally it seems that
Roy's safety-first criterion Roy's safety-first criterion is a risk management technique, devised by A. D. Roy, 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 d ...
is a good basis for portfolio selection, of course, including all generalizations developed later. However in later work the author emphasized the importance of using a coherent risk measure .DE BROUWER, Ph. (2012): “Maslowian Portfolio Theory, A Coherent Approach to Strategic Asset Allocation”, VUBPress, Brussels The problem with
Roy's safety-first criterion Roy's safety-first criterion is a risk management technique, devised by A. D. Roy, 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 d ...
is that it is equivalent to a
Value at Risk Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by ...
optimization, which can lead to absurd results for returns that do not follow an
elliptical distribution In probability and statistics, an elliptical distribution is any member of a broad family of probability distributions that generalize the multivariate normal distribution. Intuitively, in the simplified two and three dimensional case, the joint ...
. A good alternative could be
expected shortfall Expected shortfall (ES) is a risk measure—a concept used in the field of financial risk measurement to evaluate the market risk or credit risk of a portfolio. The "expected shortfall at q% level" is the expected return on the portfolio in the wor ...
.


Justification of the Theory

For many centuries, investing was the exclusive domain of the very rich (who did not have to worry about subsistence nor about specific projects). With this backdrop, Markowitz formulated in 1952 his “Mean Variance Criterion”, where money is the unique life goal. This is the foundation of “the investor’s risk profile” as today almost all advisors use. This Mean Variance theory concluded that all investments should be put in one optimal portfolio. The problem is that this is both impossible and meaningless (which is my optimal volatility, my unique time horizon, etc.). However after World War II, the investor’s landscape dramatically changed and in a few decades more and more people not only could, but actually had to invest. Those people do have to worry about subsistence and real life-goals! This automatically leads to the notion that investing should start from human needs. As
Abraham Maslow Abraham Harold Maslow (; April 1, 1908 – June 8, 1970) was an American psychologist who was best known for creating Maslow's hierarchy of needs, a theory of psychological health predicated on fulfilling innate human needs in priority, cul ...
described, human needs can each get focus at separate times and satisfaction of one need does not automatically lead to the cancellation of another need. This means that Maslow's description of human needs was the first description of the
framing effect In the social sciences, framing comprises a set of concepts and theoretical perspectives on how individuals, groups, and societies organize, perceive, and communicate about reality. Framing can manifest in thought or interpersonal communicati ...
bias in human behaviour, this means that human needs are actually observed as in separate mental accounts (see
mental accounting Mental accounting (or psychological accounting) attempts to describe the process whereby people code, categorize and evaluate economic outcomes. The concept was first named by Richard Thaler. Mental accounting deals with the budgeting and categor ...
). Therefore must be addressed one by one and each in a separate mental account. In 2001,
Meir Statman Meir ( he, מֵאִיר) is a Jewish male given name and an occasional surname. It means "one who shines". It is often Germanized as Maier, Mayer, Mayr, Meier, Meyer, Meijer, Italianized as Miagro, or Anglicized as Mayer, Meyer, or Myer.Alfred ...
and
Hersh Shefrin Hersh Shefrin (born in Winnipeg, Manitoba) is a Canadian economist best known for his pioneering work in behavioral finance. Shefrin received his B.S. from University of Manitoba in 1970. At the University of Waterloo in 1971 he received his M.S. ...
, described that people have “Behavioural Portfolios”: not one optimized portfolio, but rather pockets of separate portfolios for separate goals. In 2009, Philippe De Brouwer formulates his “Maslowian Portfolio Theory”. The idea is that for the average investor should keep a separate portfolio for each important life-goal. This created a new, normative theory that gave the justification to goal-based investing and on top of that provides a framework to use it in practice (so that no goals are forgotten and all goals are treated in a reasonable order).


References

Portfolio theories