Maslow's Hierarchy of Needs is the theory in psychology that Abraham Maslow proposed in his 1943 paper ‘A Theory of Human Motivation’. The concept for Maslow's hierarchy of needs was based on Kurt Goldstein's ‘Organismic Theory of Personality’ (1939). The basic idea is that human needs are not all addressed simultaneously, but layer by layer. One only feels the need to fulfil the needs of a certain layer if the layer below is already fulfilled, if not then the lower level will get all of one's concern.
Maslow recognises five levels. The first four lowest levels are grouped together as ‘deficiency needs’ and are associated with physiological needs. When these levels are met, the individual will not feel anything special, but when they are not fulfilled, one will become anxious. The top level is called ‘growth needs’, and is associated with psychological needs. Deficiency needs must be satisfied first, and once these needs are met, one seeks to satisfy growth needs and hence seeks ‘self actualisation’.
The clearest analogy would be the simple recognition that an individual also has layered needs when it comes to investing. First, one should seek financial safety in order to survive, and when that need is gratified one could think about speculating on the stock exchange. However, the parallel with Maslow's Hierarchy of Needs can be much more intimate. Below we briefly describe each level of Maslow's pyramid of needs and try to match suitable investments in each need level.
These are the needs of the organism such as eating, drinking, sleeping, breathing, sex, temperature that allows keeping a constant body temperature, and so on. If one of those needs is not fulfilled, this need will immediately get the highest priority, as the fulfilment of these needs is absolutely necessary for survival.
All those needs have to be fulfilled constantly; some of them come without cost in money terms, but others can be bought. Those last items constitute a challenge for the investor: to make sure that at all moments there is sufficient cash to buy these basic supplies.
The typical investments that provide high liquidity and high security are cash and money market funds; however, should we exclude putting 10 times more in an equity portfolio? When considering that resources are limited and that one can gain additional satisfaction by fulfilling higher Need Levels, we would rather be conservative here. Excess cash can be used for higher needs. The total satisfaction will be higher if a minimum is spent on the lower needs, as the highest fulfilled Need Level determines the satisfaction level of the individual.
The physiological needs are so essential that any risk that they will not be fulfilled at any time in the future gets much of one's attention and is more important than all other (higher) needs. The safety needs include, of course, the possible lack of physiological needs or any threat to one's health or security in general.
Clearly, here we need an investment portfolio constructed in such a way that at no moment in the near or distant future is there any risk of lacking the ability to buy sufficient supplies in order to guarantee the minimal conditions to survive. An approach that puts safety first on a certain part of the portfolio seems to be the logical choice here. One of the aspects is certainly retirement savings. However, also the whole period before retirement should be covered, for example in the form of income insurance or a financial reserve to start from scratch.
When physiological and safety needs are fulfilled, one develops the need to love and to be loved. This need is the basic motivator for taking care of family and offspring.
Typical examples are savings for children's scholarship, marriage, or any savings that would make their life easier or more successful. Such savings plans are generally set for 10–20 years, and for such investment horizons it is probably a good idea to invest more dynamically. Indeed, as Philippe De Brouwer and Van den Spiegel (2001) showed, Samuelson's thesis ‘that a person whose utility schedule prevents him from ever taking a specific favourable bet when offered only once can never rationally take a large sequence of such fair bets, if expected utility is maximised’ (Samuelson, 1963) is incorrect by construction of a counterexample. Their counterexample is in agreement with the Prospect Theory (Kahneman and Tversky, 1979). All fits together well and we believe that this is sufficient evidence to state that on portfolios to cover ‘Love Needs’, one generally should match the composition of the portfolio to the investment horizon and the importance of the specific goal.
The most appropriate savings are here investment funds, as they allow easily keeping a benchmark and allow for regular savings. Also, insurance linked investmentsFootnote 1 fit in the Love Needs level.
These needs are the desire for achievement, confidence to face the world, independence, freedom, the desire for reputation and prestige, recognition, attention, and importance.
Money has a twofold role in this Need Level. First, money can buy some of the goods that will fulfil the Esteem Needs, but, second, money itself can be a source of esteem and recognition.
When we focus on the factors of esteem that can be bought (but are not money in itself), we find here projects for early retirement, a dream trip, a beautiful car, and so on. Different projects with different investment horizons call for separate accounts, just as in the BPT (Hersh Shefrin and Meir Statman, 2000).
These are higher needs, and therefore there is less urging. So objectively some risk is acceptable, but subjectively the maximal risk will be determined by the psychological determinants of the investor in combination with the exact project. This is what practitioners tend to call ‘the investor's risk profile’. But putting this in the larger frame,Footnote 2 we notice that the risk profile is only valid for a fraction of any individual's portfolio.
This leads to the important insight that one investor has multiple risk profiles. One investor can have totally different risk profiles for different need levels, but also for investment goals within one need level. For example (limited to the Esteem Level only), an investor might have a flexible budget for a dream trip, but when he returns, he really wants to buy a certain car. His investment plan should consist of a rather sure (please do not confuse with ‘low volatility portfolio’) plan for the car and a plan that is more flexible/dynamic for the dream trip.
The observation that each individual has not one but many risk profiles can also be seen as a direct consequence of BPT (Hersh Shefrin and Meir Statman, 2000). Actually Meir Statman makes this very explicit in his 2004 paper, however without referring to the term ‘risk profile’ used by practitioners.
If investments are the means to obtain one or more goals in the Esteem Need Level (so if investments are not the goal in itself), the typical choice here would be a selection of mutual investment funds, or a systematic savings plan into a mutual fund. However, if money itself is used to fulfil (an aspect of) the Esteem Need Level, then other investment solutions might be suitable. Typical solutions would then be an exclusive investment product that allows for large degrees of personalisation.
Need for self-actualisation
‘What a man can be he must be’ (Maslow, 1943). Emanations of needs in this need level are the search for truth, religious interest and artistic expressions. The exact form that these needs will take differs significantly from person to person. The emergence of these needs rests upon prior satisfaction of all the previous need levels.
One could think that here, no investments are needed; however, self-actualisation depends strongly on the person. It might be that a certain person likes to understand the dynamics of the stock exchange and that his personal challenge is to outperform these markets. Such an individual will find his self-actualisation in trading on the stock exchange or building his bond portfolio himself. This need is typically satisfied by having a broker account and not an investment fund, unless one wants to construct his portfolio of funds and in that way create his own ‘fund of funds’ and manage that portfolio of funds actively.