An empirical investigation of investors’ non-financial needs: The case of relatively rich investors in the Netherlands.

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An empirical investigation of investors’ non-financial

needs: The case of relatively rich investors in the

Netherlands.

Thesis written as student MSc International Financial Management, University of Groningen, The Netherlands.

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Abstract

This paper operationalizes the main principles of the Maslowian Portfolio Theory (MaPT) of De Brouwer (2009). The theory gives suggestions which aspects can be taken into account in terms of the client’s needs, besides criteria based on expected return and risk. The results of the questionnaire, held amongst clients of Schretlen & Co., imply that relatively rich investors try to satisfy their esteem and self-actualization needs, in addition to their financial needs. The paper also demonstrates that esteem needs mainly arise for investors with higher education and with more capital. Self-actualization needs are through investing, however, negatively related to education and parenthood, but positively related to capital and investment related knowledge and experience. Finally, the paper shows by which investments, projects or services investor’s esteem needs can be satisfied. The investment community may use those new insights in developing improved services for their clients.

JEL classifications

G11, D03, G21

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I Introduction

Philosophers from Plato onwards have discussed the relevance of human needs (Jackson, et al., 2004). If the amount of literature, written about the human needs in the field of economic psychology, is a relevant measure for the importance of this concept, we can already draw our first conclusion: it is very important indeed. If it is possible to determine which human needs serve as the most important motives for people in decision-making, we would have a far better understanding of what they like to achieve and how they act.

This paper assumes that investors try to satisfy more than just financial needs by means of their financial investments. This idea is comparable to Statman’s assumption (2004) that investors next to the utilitarian benefits of low risk and high expected returns also want to satisfy expressive benefits. By expressive benefits he means characteristics of investments that add meaning beyond utilitarian characteristics. In fact this idea is questioning one of the most important principles of Markowitz’s ‘Modern Portfolio Theory’ (1952), which states that investors are only concerned about risk and expected returns.

Former studies about investors’ needs have shown empirically that investors like to have social and intellectual needs satisfied, in addition to financial needs (Hoffmann et al., 2006;Hoffman, 2007; Hoffmann and Broekhuizen, 2009). For instance, some investors find it important to talk with other people about investing and their investments, or like to affiliate with other investors. When these types of needs emerge, investors are more exposed to the interpersonal influence in an investment context (Hoffmann and Broekhuizen, 2009) and conformity behavior (Hoffman et al., 2006). Hence, these needs, in collaboration with the investor’s environment and society, can influence the investor’s decision-making process for financial products.

Nowadays, purchasing financial products has many similarities with the purchase of, for instance, a car. For both products customers expect to satisfy their needs with the purchase of the product. However, since finance journals mainly stress the utilitarian benefit of low risk and high expected returns (Hoffmann, 2007), it is not surprising that financial advisors primarily take into account the investor’s need for financial gain.

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called MaPT). It is based on the more general psychological theory about the hierarchy of human needs as formulated by Maslow (1943). The original theory of Maslow emphasizes the individualistic nature of needs-satisfaction and treats the importance of the environment as secondary for individual motivation (Jackson et al., 2004). As a consequence, the MaPT describes what human needs can be satisfied by investing, which directly influences the investor’s decision for particular financial products and/or projects. This is related to the qualitative observations of Nevins (2004), who says that investors’ goals are best captured in stating them in terms of the lifestyle needs to achieve a desired standard of living, wealth transfers to one’s children and/or family, and charitable gifts, which include any ‘cause’ which the investor wishes to contribute to.

The MaPT differs, however, to what recently developed studies concerning investors’ needs do. Former studies into investors’ needs primarily measure how consumers’ investment decisions are influenced by the emergence of investor’s needs in interaction with the investor’s environment. For instance, Hoffmann et al. (2006) and Hoffmann and Broekhuizen (2009) distinguish multiple investors’ needs in order to be able to test whether those needs -for instance social or intellectual needs- influence the investor’s investment behavior in such a way that it corresponds to that of other investors in their social environment. As a consequence, investor’s decisions for financial products are more indirectly derived, based on the extent to which the investor have social and intellectual needs in collaboration with the investor’s environment.

In Hoffmann’s study (2007) of the distinction of multiple investor’s needs, he already refers to Maslow’s Theory of Needs. According to him, the original human needs hierarchy theory of Malsow lacks to acknowledge that human needs may be satisfied simultaneously. De Brouwer (2009) does however not agree upon this point, and based on other behavioral finance literature (Kahneman and Tversky 1979; Shefrin and Statman 1997) he assumed that needs have to be addressed layer by layer in a portfolio. This study will empirically investigate whether in general investors wish to satisfy their needs at the same time, or in a more hierarchical way.

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are however all needs that can be expressed in a more Maslowian classification of investor’s multiple needs. An advantage of the MaPT is that it ranks the different investor’s needs in a hierarchy. For financial advisors, such a hierarchy provides a clear framework to classified needs, when they intended to assess their clients’ needs.

Since De Brouwer (2009) gives just a description of the MaPT, based on qualitative instead of quantitative research, it is necessary to operationalize the theory, and moreover, test the applicability of this theory for practitioners. This is especially relevant since De Brouwer considers the MaPT as predictive in the design of the optimal investor’s portfolio. This study therefore investigates empirically whether the main principles of the MaPT hold in practice.

According to De Brouwer (2009), an investment portfolio can be considered as a pyramid, in which every layer clearly represents a separate goal of the investor. The different goals are formulated according to the human needs that are laid down in Maslow’s Theory of Needs (1943). The first three layers are primarily goals driven by investors’ financial needs. However, the fourth and fifth layers are respectively an investors’ esteem and self-actualization needs. The fulfillment of these needs has a different meaning for investors than merely increasing their wealth.

This study is done on behalf of Schretlen & Co. These are Dutch financial advisors that invest their clients’ capital and gives them advise about investments. Most of Schretlen & Co.’s clients are among the wealthiest in the Netherlands. The investment managers of Schretlen & Co. are expected to have a good grasp of which needs their clients want to be satisfied by their investment portfolio. However, the investment philosophy of Schretlen & Co. primarily stress the investor’s need for financial gain, which is further divided into four fundamental objectives. These are respectively ‘liquidity’, ‘capital maintenance’, ‘income’ and ‘growth’.1

For Schretlen & Co. it becomes relevant to find out if, and if so, what other needs than financial needs investors try to satisfy by investing. A better understanding of what additional non-financial needs their clients pursue, will help investment managers to design the best

1_{Schretlen & Co. defines a person’s ‘liquidity need’ as the need to retain access to their financial means on a}

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investment portfolio for their clients in terms of all of their needs. This will, in the end, increase the satisfaction of Schretlen & Co.’s clients and thereby also their satisfaction with Schretlen & Co.

For this study an online questionnaire was sent to Schretlen & Co’s clients. Schretlen & Co.’s clients are a particularly good sample to use for this study, due to the fact that these investors are among the wealthiest people in the Netherlands. This may increase the chances for investors to actually strive for the satisfaction of other needs than their financial needs. Like Conaway (2001, p. 128) states: ’Simply being rich is no longer enough … One must be legitimate as well, a form of acceptance that goes beyond financial success and involves the great imponderables of taste and inner worth’.

Hence, the main research question of this study is: ‘to what extent will investors, and in particular relatively rich investors, like to use their capital for other purposes than merely increasing their wealth’. This study will furthermore examine what non-financial needs relatively rich investors have, if investors’ needs have to be satisfied simultaneously or hierarchically, and which type of investors is most in touch with which needs. However, first I will give a short overview of the most relevant theories on which the MaPT is based. Subsequently, the methodology is described, where after the study’s results are presented. The paper ends with conclusions and implications for financial institutions regarding their investment strategy.

II Theoretical background

2.1 Behavioral Portfolio Theory

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between returns. BPT investors on the other hand, choose portfolios based on the probability of attaining a certain aspiration level. Since the MaPT is built on the principles of Behavioral Portfolio Theories, the latter will be explained shortly.

Some investors have exclusively low aspirations and others have exclusively high aspirations. However, most investors combine these aspirations in the way that they want both to avoid poverty, but they also aim for a shot at riches. Hence, portfolios that combine low and high aspirations are often depicted as pyramids consisting of layered needs. Investors then divide their current capital between a bottom layer, included to avoid poverty and a top layer, designed for a shot at riches (Shefrin and Statman, 2000). This results in portfolios that are built as pyramids of assets, wherein every single layer is associated with its own financial goals.

The BPT thus questions an important principle of the MPT, namely that investors are always risk averse. Lopes (1987) did this by introducing the two-factor theory of risky choice, an extension of the safety-first portfolio model. In this theory, ‘security’ and ‘potential’ are factors that are considered as goals. The goal of averse people is ‘security’, while the goal of risk-seeking people is ‘potential’. Lopes noted that, while some people are primarily motivated by ‘security’ and others primarily by ‘potential’, the two motivations exist in some strength in everybody. Investors do simultaneously display both risk averse and risk seeking behavior, for example by putting money in a safe bank and at the same time buying a lottery ticket.

This kind of behavior is explained by the prospect theory of Kahneman and Tversky (1979). An important feature of this theory is the investor’s reference point. These points can be translated as people’s aspiration levels. The utility curve of the prospect theory measures gains and losses relative to a reference point. Aspiration levels, and therefore also reference points, differ among people. For instance, people aspire to be rich but differ in the amount of money they define as ‘being rich’. Hence, a similar financial goal, for example ‘income’ or ‘growth’, is perceived differently by different people. Furthermore, investors frame monies into a variety of distinct mental accounts and attach utility to each mental account in isolation from other mental accounts (Shefrin and Statman 1997). As a consequence, one person has a different utility curve for each separate goal.

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beyond the reference point of a lower aspiration, that they have already reached. The Maslowian Portfolio Theory is based on the latter principle in particular.

2.2 Maslowian Portfolio Theory

De Brouwer published the ‘The Maslowian Portfolio Theory: An alternative formulation of the Behavioral Portfolio Theory’in 2009. Via the Theory of Needs from Abraham Maslow he developed the Maslowian Portfolio Theory (MaPT). The idea behind the development of this new portfolio theory is that human needs cannot all be addressed simultaneously, but have to be addressed layer by layer. The need that constitutes the lower layer has to be satisfied, before the need represented by a higher layer can be addressed. So, De Brouwer assumes that when it is about investing, an individual has layered needs, also called aspiration levels (see figure 1). Figure 1 – ‘The Maslowian Portfolio Theory’ and ‘The Theory of Needs’ integrated

The first layer constitutes needs of the individual like having food, clothes and sleep. The type of investments that belong to this level give liquidity, like cash and savings.

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conditions to survive (De Brouwer, 2009). A portfolio constructed by a certain asset combination that pursues the goal ‘capital maintenance’, is the most appropriate one for this layer.

After completing psychological and safety needs, a person is developing the need to belong to someone (Ventegodt et al., 2003). This is taking care of family and offspring. Typical investments in this layer are savings for children’s scholarships, savings for marriage, or any savings that would make a person’s life easier or more successful (De Brouwer, 2009). These plans have often an investment horizon of at least ten to twenty years. This is asking for a more dynamic investment plan, which is giving a client ‘income and growth’ of capital in the long run. The different needs of the first three layers can be summarized as one common need, namely the investors’ financial need. The needs of layer 1 to 3 are already incorporated in the investment philosophy of Schretlen & Co. Investment managers of Schretlen & Co. are aware of investors’ financial needs and try to satisfy these needs by allocating the assets in the client’s portfolio in a way that satisfies the client’s financial needs.

The fourth layer constitutes a person’s esteem needs, like the desire for achievement, the confidence to face the world, independence, freedom, the desire for reputation and prestige, recognition, attention and importance (De Brouwer, 2009). In other words, it is a person’s need to be respected and acknowledged by others. However, an important precondition for the transition to the fifth layer, is for a person to develop self-respect as well. Because, it is only when we respect ourselves that we can access the hidden resources of our life, like knowledge (Ventegodt et al., 2003). Focusing on factors of esteem that can be related to investments, we find that investments are then often not the goal in itself, but the things you want to create for yourself and others with the money.

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on the person, it is difficult to say how these needs can be met. If we apply this to wealth, it may be that a person likes to understand or learn the dynamics of the stock exchange and that his personal challenge is to outperform the market. This person will (partly) construct his own portfolio of funds and manage it actively. The development of fun, education and adventure by investing are then important things in the fulfillment of this layer.

Having indicated the theoretical background of the MaPT of De Brouwer (2009), we now intend to operationalize the theory and the relations that we want to measure, while additional theory is used in the operationalization of the concepts.

2.3 Conceptual model

The fact that Markowitz’s mean-variance optimization model is the industry standard for portfolio construction (Sumnicht, 2009), serves as important evidence that investors try to satisfy financial needs by investing. The standard model is however solely based on statistically calculated characteristics of returns in order to determine the portfolio’s optimal asset allocation. With a certain combination of assets the client will receive the highest return for the lowest risk, aimed to satisfy the client’s financial needs. Consequently, financial institutions like Schretlen & Co. take primarily this type of needs into account in the allocation of the assets in clients’ portfolios. In this paper we thus do not to test actively whether investors really strive for the satisfaction of these needs, as this is the basic by investing.

Therefore, this study aims to find out if investors want to have other non-financial needs to be satisfied by investing. This means that the research will focus on the top two layers of the triangle, illustrated in figure 1. So, the main question in this study is: ‘to what extent will investors, and in particular relatively rich investors, like to use their capital for other purposes than merely increasing their wealth’.

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once I have identified which non-financial needs investors have, it is important for financial institutions to know what kind of investor is attached most to these needs, and lastly, by which investments or projects are these needs satisfied.

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Figure 2 – Conceptual model

2.4 Concepts and investor characteristics

The first concept that has to be measured is ‘esteem needs’ (represented by layer 2, figure 2). These needs are, for instance, satisfied when people have gained self-respect and recognition from others. The choice for the measurement of these values is based on the duality of the concept ‘esteem needs’. A person’s esteem needs are on the one hand fulfilled internally, expressed in values such as the desire for achievement and independence. On the other hand, they are fulfilled externally, expressed in values as attention and acknowledgement. Since it is not possible for this study to measure each value separately that is implied by the concept ‘esteem needs’, it is important to incorporate at least the duality of the concept ‘esteem needs’ into the questions. This is done by the measurement of the values self-respect and recognition from others, which are respectively generated internally and externally for people.

Nevertheless, it is difficult to define precisely what can bring a person self-respect and recognition. De Brouwer (2009) indicates that the fulfillment of this need can be done by different projects, so it is not clear which exact project or investment will satisfy an investor’s esteem. However, in general, the goal of these projects is initially not to acquire more money. For this study I take as the main starting point that people will generate self-respect and recognition by investing in projects that, to a certain extent, deal with values such as ‘care’,

3. Investors’ self-actualization needs (layer 5 of figure 1)

2. Investors’ esteem needs (layer 4 of figure 1)

1. Investors’ financial needs (layer 1 to 3 of figure 1)

5. Who wants these needs satisfied?

4. Who wants these needs satisfied?

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‘charity’ and ‘sustainability’. Formulating these concepts into one concept, we may call it socially responsible investing (SRI). SRI can be defined as the process of integrating personal values and societal concerns into investment decision-making. People feel the need to put their capital to work in a manner that is more closely aligned with their personal values and priorities, since they feel better about themselves having a more socially responsible investment portfolio (Schueth, 2003). Investors try to express their social values through investing (Glac, 2008) and are focused on what their money can actually do to make a positive contribution to society. However, socially responsible investing portfolios are private in the way that your neighbor generally does not know what investments you make. However, according to Statman (2004), socially responsible portfolios offer great self-signaling benefits in that investors signal their social responsibility to themselves. In other words, it may increase a person’s inner worth which will internally enlarge a person’s self-respect.

SRI has even begun to enter the mainstream of investment practice (Sparkes and Cowton, 2004). Lydenberg (2007) is supporting this by the conclusion that SRI in the field of investing is increasingly gaining recognition around the world. He goes even further and makes a distinction between types of investors based on the emergence of SRI. He says that universal and social investors are theoretically inclined to seek returns that benefit society and the environment as a whole, while the tenets of the ‘Modern Portfolio Theory’ lead the rational investor to seek returns based primarily on the market price. The first group of investors feels the need to create a just, sustainable, healthy and wealthy society, while still achieving market-rate returns (Lydenberg, 2007). However, interpreting this according to the principles of the MaPT, people will not care for these needs until their financial needs have been satisfied by other assets in their portfolio. However, from that point on investors do attach more importance to the type of investment and what it can do for them besides their financial needs.

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emerging entrepreneurs in developing countries is also a good example. In short, these are all projects that are wished by investors and that will in the end enlarge their esteem.

Furthermore, Schretlen & Co. has already noticed that their clients are concerned about their children inheriting their capital. Then the question arises, are they able to deal with such a large sum of money and how do they actually have to deal with it? These projects are being called “Futures & Co.” and for more grown-up children, “Masters & Co.” Furthermore, clients do appreciate to get help from Schretlen & Co. by taking care of their financial business in order to have things well organized after their death. Such a project is called “Capital care”. Both projects are services for which clients have to pay a reasonable price and which do not yield the purpose to create more money, but to take care of offspring in a non-financial way. For this study those type of investment services are included as well.

The second concept that has to be measured is ‘self-actualization needs’ (represented by layer 3 in figure 2). These needs are satisfied when people have developed themselves by acquiring knowledge, using this knowledge to create something, and in the end view themselves as an important part of the system. Again, the goal here is not to acquire money. As already mentioned, there are no investments or projects, which can meet this need directly. Here the investment process itself is rather important. Investors are eager to learn and understand how the market works, and based upon this information and knowledge, they want to choose some funds for their portfolio, of which they think it will probably outperform the market and lets them see if they are right and learned the game that the market plays well.

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knowledge, the more a person will display the need for self-actualization. However, these are just assumptions, based on common sense and not on theory.

Nevertheless, it is interesting for financial institutions like Schretlen & Co. to have certain guidelines regarding what type of investors are also willing to use their capital for other purposes than just increasing their wealth (represented by layer 4 and 5, figure 2). In order to identify what kind of investors these are, it is necessary to determine what variables influence this. Therefore, this survey will focus on the following eleven investor characteristics; gender, age, education, marital status, parenthood, investor’s amount of capital, total investments of the investor’s capital, investment horizon (further subdivided into short, medium and long term investments), entrepreneurial experience, investment-related knowledge, and investment-related experience. Some of these variables were also used in a study about ‘financial risk tolerance’ by Hallahan et al. (2004). They have found some significant differences regarding people’s risk tolerance level more or less based upon this set of variables. So, this set variables is an important measurement tool in order to find out to who is attached most to the esteem and self-actualization needs.

III Methodology

3.1 Sample, measures and questionnaire

Information from Schretlen & Co.’s clients is collected via an online questionnaire, created and sent via a website called www.surveymonkey.com. The questionnaire was sent on December 22, 2009. In the first week of 2010 a reminder was sent to those who had not yet filled in the questionnaire. On January 15, 2010, the questionnaire was closed. Respondents were able to fill in the questionnaire anonymously. However, they had also the option to leave their email address behind when they were interested in getting the study’s results. Furthermore, the respondent was informed about the aim of the study and to what main question the study tries to find an answer. Finally, they were notified that the data are going to be used for an academic study and would only be available to the researchers and Schretlen & Co. The estimated time to fill in the questionnaire completely was about ten minutes.

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over these five establishments. In total 381 people filled in the online questionnaire, either partially or completely. However, some of them did not give their permission to use the information for scientific research, as was explicitly asked, and those surveys were not included in this analysis 2.

Table 1 shows the questionnaire. The questions were classified into four groups:

I. General characteristics. Question 1 to 14 are raised to give important insights in the characteristics of the respondents.

II. Esteem needs 1. Question 15 to 19 relate to what extent the respondents want their esteem needs to be satisfied by investing. Question 20 does not really measure the concept ‘esteem needs’, but indicates what percentage of their total investments the respondents would like to invest for other purposes than increasing wealth.

III. Esteem needs 2. Question 21 to 29 cover the difference in investors’ preference for certain projects, investments and services, which may fulfill esteem needs. Question 30 is raised to find out the importance of the tax benefit in the investors’ decision to invest in charity. This question is only raised in relation with charity, since only investing in charities and/or sustainable companies may provide the investor a tax benefit. Besides, it is the Dutch Ministry of Finance that determines for which charities and companies the tax benefit to investors apply.

IV. Self-actualization needs. These last questions (31 to 35) aim to find out to what extent the respondents satisfy the need for self-actualization by investing.

Table 1 presents the response rate per question (N), the mean, the median and the standard deviation. The response rate may differ per question, because respondents were given the option to leave questions unanswered due to privacy reasons. As a consequence, part of the questionnaires contain missing answers, although, these questionnaires were still used for the

2_{This study has used the complete dataset to test whether the exclusion of these surveys potentially lead to other}

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analysis. In the end, on average 230 questionnaires remained, which results in a response rate of almost 22% 3. In those cases where a Likert scale was used, the respondent had to choose between five response options, which were respectively 1 = totally disagree, 2 = disagree, 3 = neutral, 4 = agree, and 5 = totally agree.

Table 1 - Questionnaire

Valid responses of individuals who allowed to use their answers for scientific research.

Question N Mean Median Standard

Deviation I. General characteristics

1 Man 253 - - -

2 Woman 33 - - -

3 Age 278 57.50 59.00 10.01

4 Education (scores from 1-4) a) 283 - b) 2.00 - b) 5 Marital status (scores from 1-4) a) 281 - b) 1.00 - b)

6 Parenthood (scores from 1-4) a) 280 3.08 3.00 0.96

7 Capital (scores from 1-5) a) 269 2.07 2.00 1.00

8 Total investments of capital (measured in %) 250 70.30 77.50 23.83

9 Short-term investments (measured in %) 222 26.85 20.00 25.92

10 Medium-term investments (measured in %) 224 37.84 40.00 25.62

11 Long-term investments (measured in %) 220 33.35 30.00 30.61

12 Investment-related knowledge (scores from 1-5 on a Likert scale)

244 2.89 3.00 0.98

13 Investment-related experience (measured in years) 239 14.36 12.00 10.08

14 Entrepreneurial experience 242 16.90 16.50 13.62

II. Esteem needs 1

(Scores from 1-5 on a Likert scale)

15 I am willing to invest a part of my capital in other things, which are not initially meant for increasing my wealth.

240 2.46 2.00 0.90

16 I am only willing to invest a part of my capital in other things, which are not initially meant for increasing my wealth, when the other investments in my portfolio satisfy my financial needs, like ‘income’ and ‘growth’.

232 3.04 3.00 0.98

17 I find it important to get a return on my investment, 235 3.42 4.00 0.91

3_{The relatively high response rate may result from the good relationship between Schretlen & Co. and their clients.}

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even if the purpose of the investment differs from the purpose of increasing wealth.

18 I find it important that my investments contribute to the development of a ‘better world’.

234 3.20 3.00 0.83

19 I am willing to use my capital to realize certain things, which are not directly related to personal gain, but are also highly appreciated/valued by others.

233 3.14 3.00 0.90

20 When you are willing to give up some return on your investments, which are initially meant for other purposes than increasing your wealth, what percentage do you want to invest?

215 8.25 5.00 10.59

III. Esteem needs 2

(Scores from 1-5 on a Likert scale)

I would like to invest a part of my capital in the following:

21 Charities 207 2.74 3.00 1.09

22 Sustainable companies/projects 207 3.49 4.00 0.98

23 Microloans to entrepreneurs in developing countries 204 3.26 3.00 1.01

24 One specific company 196 2.47 2.00 0.97

25 One specific sector 195 2.43 2.00 0.92

26 Art and culture 199 2.33 2.00 1.01

27 Sustainable building projects 203 3.00 3.00 1.04

28 Capital care 211 3.36 4.00 1.03

29 Futures & Co. and Masters & Co. 192 3.22 3.00 0.97

30 The tax benefit is important to me when I invest in

charities and/or sustainable companies/projects.

221 3.22 3.00 0.88

IV. Self-actualization needs (Scores from 1-5 on a Likert scale)

I find it important to …

31 …analyze the market and/or to search for new forms of investment and/or gain more investment-related knowledge.

218 3.29 3.00 0.89

32 … use my investment-related knowledge in the selection of my assets for my portfolio.

210 3.40 3.00 0.83

33 … get pleasure from investing. 217 3.41 4.00 0.97

34 … to partly determine what investments in my portfolio should be done, because I would like to see whether my choice of assets pays off.

218 3.38 4.00 0.98

35 …beat the market/benchmark with my investment-related knowledge.

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3.2 Respondent characteristics

Sample characteristics may influence the respondent’s scores. Since this study tries to give a practical advice to Schretlen & Co. and other financial institutions, it is important to know how far our sample is out of line with the general population of investors. Two samples of other surveys are used to make a comparison with our sample on the following: the respondent’s age, gender and portfolio-size. Firstly, our sample is compared with data from the TNS-NIPO investment survey (2002). TNS-NIPO is the Dutch institute for Public Opinion and Market Research. Secondly, for age and gender it is further compared with a sample from a study of Guiso et al. (2007). They have based their survey on Dutch data and take into account all bank customers.

However, since our study is focused on the wealthiest investors in the Netherlands, the modal portfolio-size of our respondents differs highly from the ones of the general population investors. On average our respondents own a capital between the one and two million euro, of which they invest on average 70,3%. In general, the modal size of the portfolio of a Dutch investor is far less, namely 50.000 euro (TNS-NIPO study, 2002). This difference in size cannot be attributed to the inflation between 2002 and 2010 in the Netherlands, as the price index increased in that period by 14,5% (Dutch Central Statistical Office).

On average, our respondents are older, with a difference of almost ten years, which is 57,5 compared to 48 years in the TNS-NIPO survey (2002) and 55 in the survey of Guiso et al. (2007). Furthermore, our sample contains more men (88%) compared to 71% in the TNS NIPO survey (2002) and the same percentage found in the survey of Guiso et al. (2007).

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The relatively rich investors in this study have some characteristics of which it is not sure if these are similar to “average” investors. We therefore only mention the characteristics of our group. In general, our sample consists primarily of investors who have finished higher professional education, are married or have a civil partnership and have two children. Their investments are mainly invested in the medium term (40%), they have 12 years investment-related experience and classify themselves as average with regard to their investment-investment-related knowledge.

3.3 Statistical methods

Factor analyses are made in order to define the underlying structure among the variables in the analysis. Specific items that correlate highly are assumed to be a member of a broader dimension (Hair et al. 2006). For this study I hope to find two broader dimensions, each labeled as one specific factor, translated into both the investors’ esteem needs as self-actualization needs. These factors may namely indicate what needs investors try to satisfy by investing and further, how investors’ esteem needs then are satisfied by the investor’s choice for particular investments, projects or services.

For these factor analyses, the basic rules for performing a good factor analysis have been met. The sample of the analysis always includes more observations than variables and is much bigger than the size that is considered to be a relevant minimum of ‘100’ observations.

After having analyzed what needs are important to satisfy for investors, it is necessary to link the general characteristics of the respondents to these particular needs. This will show what type of investor is attached most to which needs. The easiest way to see whether two items are related to each other is the execution of bivariate correlations. Thereafter, multiple regression is used as a statistical technique to test further which set of variables predict behavior (Brace et al. 2006). The following formula is tested by the multiple regression analyses:

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questionnaire). For this study, the computer program SPSS version 16.0 executes all statistical tests.

IV Results

4.1 The identification of investors’ needs

Esteem needs. Table 2 presents the results of a factor analysis performed on the questions that are supposed to measure the extent to which an investor wants to have their esteem needs satisfied by investing. These are the first five questions of part II (15-19), called ‘Esteem needs 1’.

Table 2 – Factor analysis for measuring investors’ esteem needs

Question Unrotated Component Matrix

Rotated Component Matrix (VARIMAX)

Communalities

Factor 1 Factor 2

Factor 1 Factor 2 Factor 1 and 2

15 0.68 0.25 0.71 0.17 0.53 16 0.69 0.37 0.72 0.29 0.61 17 -0.04 0.88 0.06 0.88 0.77 18 0.73 -0.37 0.68 -0.45 0.67 19 0.74 -0.17 0.71 -0.25 0.57 Constructed variable ‘esteem needs’ 15-16 & 18-19 2.96 Variable ‘the importance of return’ 17 3.42

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reduction in order to get a smaller set of variables, which can be used for other multivariate techniques (Hair et al. 2006).

As table 2 shows that two (rotated) factors4 can be distinguished. The first factor is labeled as the investors’ ‘esteem needs’ and is constructed by four questions. The second factor is constructed by one question and is labeled as the ‘the importance of return’. For both factor 1 as well as factor 2, the loadings are greater than (.5), which is generally considered to be the minimum for practical significance. In addition, it is important that variables have communalities greater than (.5) to be retained in the analysis. A communality represents the amount of variance accounted for by the factor solution for each variable (Hair et al. 2006). The communalities in this factor analysis were all sufficient (>.5) in order to retain each variable in the analysis (see table 2).

The existence of a second factor is unexpected. It indicates that some investors find it important to have a return on their investments, regardless of the purpose of the investment. It specifies that there is not a very strict hierarchy in needs for all investors, even within the group of relatively rich investors. Some find it important to get a return on their investments, even if the purpose differs from increasing wealth (see question 17). The first factor, however, shows that some (other) relatively rich investors want to use their capital for other purposes than increasing their wealth, and that they may use investments to gain recognition from others and to contribute by the development of a ‘better world’.

The expectation, however, was that question 17 from the questionnaire would have a significant negative loading on factor one. If so, this would have indicated clearly that the respondents do not find it important to have a return on investments that are initially made for satisfying the investor’s esteem needs. The outcome of two factors makes a clear separation between these needs and shows that at least some relatively rich investors pursue to have a return on an investment, irrespective to the investment’s purpose.

However, since these two factors do not correlate at all with each other, it seems to be that the importance of return and the investor’s esteem needs still do not have to be satisfied simultaneously, even though some of the relatively rich investors assume that it is possible to get a return if the purpose of the investment is not increasing wealth. This is in line with the fact that

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many of the respondents indicate that they find it important to have their esteem needs only satisfied when their portfolio is designed in such a way that it may fulfill their financial needs completely (question 16). So, in general investors do first want to know, and moreover see which asset class in their portfolio is responsible to satisfy their financial needs. These needs are then respectively ‘savings’, ‘capital maintenance’, ‘growth’ and ‘income’, which are the financial goals of the first three layers of the MaPT pyramid.

If we test further the correlation between the capital variable (question 7) and factor 2, we find a correlation coefficient (r) of 0.04, which is not significant. Similarly, if we distinguish within our sample between the rich and the very rich, we do not find significant correlations either. It is therefore likely that investors do not fully separate return requirements from non-financial needs.5

Cronbach’s alpha is a widely used measure for questionnaires to assess the consistency of a scale. In general, a scale should have a minimum Cronbach’s alpha value of (.7) (Brace et al. 2006). However it may decrease to (.6) in exploratory research (Hair et al. 2006). The Cronbach’s alpha for the questions of factor 1 (question 15, 16, 17 and 18) was (0.67), which is thus sufficient for this research. Moreover, Cronbach’s alpha will not become higher after deleting items from the scale (appendix 2.0, table A.1).6 Table 2, therefore, also presents the constructed variable ‘esteem needs’ (results of the summation of questions 15, 16, 18 and 19) and variable ‘the importance of return’ (question 17). Firstly, these were computed to use as a check whether there really existed no correlation between the investors’ esteem needs constructed variable by adding questions 15, 16, 17 and 18, and the need to still have the potential for financial gain (question 17). A bivariate correlation between these two variables showed there was indeed no significant positive correlation between these needs. The correlation coefficient is even slightly negative (-0.01) with a p-value of (0.93). Secondly, for this study, both the factors, as well as the constructed variables are used for the regression analyses to see

5_{Though we assumed that higher order Maslowian needs would be felt more if investors are relatively rich, one}

might, of course, also assumes that these investors may think that returns are more important than “average investors”. The latter assumption is however refuted by further calculations.

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whether the esteem needs measured by the rotated first factor and measured by the constructed variable yield the same results.

Self-actualization needs. The next factor analysis defines the underlying structure among the variables that measure investors’ self-actualization needs. Due to the fact that the outcome of this analysis is just one factor, it was not possible to rotate the matrix by VARIMAX. Table 3 demonstrates the results of this analysis.

The factor is labeled ‘self-actualization needs’ and is constructed by five questions. The factor loadings are particularly high for question 32, 34 and 35, namely (0.81). (0.80) and (0.76). This means that the respondents especially value the ‘advanced needs’ of layer five, which is the need for knowledge, understanding and creativity. They value the more so-called ‘abstract needs’ less. That is the need to be a valuable part of the system and get pleasure from investing, which is content-wise covered by respectively question 31 and 33. Nevertheless, all questions have high factor loadings on one single factor, which is further supported by a Cronbach’s Alpha of (0.81). Moreover, the Cronbach’s Alpha becomes lower after deleting one of these 5 items (appendix 2.0, table A.2). All communalities are sufficient with the exception of question 31, which has a value of (.48). However, since the Cronbach’s alpha would be lower by deleting this item, it will be retained in the analysis. The constructed variable ‘self-actualization needs’ (the summation of question 31-35) gives further an average value of (3.26).

Table 3 – Factor analysis for measuring investors’ self-actualization needs

Question Unrotated Component Matrix Communalities

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A bivariate correlation between the factors ‘self-actualization needs’ and ‘the importance of return’ shows that investors try to satisfy their need for financial gain and self-actualization simultaneously. There is namely a significant positive correlation between the factors ‘self-actualization needs’ and ‘the importance of return’. The correlation coefficient (r) is (0.15) and is significant at the 5% level with a p-value of (0.04). As a consequence, investors find it important to analyze the market, increase their investment-related knowledge and use this knowledge for asset allocation, while at the same time they still find it important to get a return on these investments. This is not highly surprising, since investors like to see if they have attained, and moreover, used the correct knowledge about the market, what is primarily reflected in the return they have made on their investments. The result of simultaneity of the importance of return and of self-actualization needs is comparable to the simultaneity between esteem needs and the importance of return.

In summary, the analyses have identified three distinct investors’ needs. These are the importance of return, esteem needs and self-actualization needs. For some investors a portfolio should be built hierarchical when it concerns the satisfaction of his or her financial needs and esteem needs (the bottom and the second layer of figure 2). It is different though, with regard to investors’ financial needs and self-actualization needs (the upper layer of figure 2). In general, these needs have to be addressed simultaneously by the investor’s portfolio. For instance an investment is done aimed to generate ‘income’ or ‘growth’ for the investor. This same investment, however, may simultaneously satisfy the investor’s self-actualization needs. The investment could for instance be based on the investor’s knowledge and expectation that it will outperform the market.

4.2 Investors’ characteristics linked to investors’ needs

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needs’. This is done to observe what questions are related to which need, and whether this relationship is positive or negative. Table 4 presents the results of these correlations.

As shown in table 4, there is a significant positive correlation of the factor as the variable ‘esteem needs’ with both question 4, about the investor’s level of education, and question 7 about the investor’s capital. With regard to the factor importance of return, no variables prove to be significant. The variable ‘self-actualization needs’ shows on the one hand a significant negative correlation between question 6, about the number of children the investor has, and on the other hand a significant positive correlation between questions 12 and 13, respectively about the investor’s investment-related knowledge and experience.

Based on the information from the bivariate correlations it was possible to estimate what characteristics will, in general, predict what type of investor is in touch with which need in particular. By using multiple regression we test which set of variables is predicting behavior (Brace et al. 2006). Since we had no clear reason to believe that one variable is more important than another beforehand, the Enter method was used for this study’s regression analyses. Each predictor variable (1 to 14) is entered into the analysis simultaneously and subsequently their contribution to the prediction of the dependent variable is assessed. This assessment is done based on the adjusted R square. This is a useful measure to indicate the success of the model in predicting the dependent variable (Brace et al. 2006). So, a variable was deleted from the model when it decreases the model’s adjusted R square. The final models (see below table 5 and 6) are thus the ones with the highest adjusted R square scores.7

7_{Because the factor ‘importance of return’ could not provide any variable with significant results (see table 4), this}

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Table 4 – Bivariate correlations between investors’ characteristics and investors’ esteem needs and self-actualization needs

* Correlation is significant at the 0.1 level (2-tailed) ** Correlation is significant at the 0.05 level (2-tailed) *** Correlation is significant at the 0.01 level (2-tailed)

In the regression analysis to explain investor’s esteem needs (table 5), the dependent variable is ‘esteem needs’ and the predictor variables are ‘education’ and ‘capital’. For each predictor Question Factor (rotated)

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variable both table 5 and 6 present respectively the unstandardized coefficient (B), the t-value and the standardized coefficient. First, the unstandardized coefficient (B) shows the increase in the dependent variable for an increase of 1 in the predictor variable. Secondly, the t-value gives information about the impact of each predictor variable on the dependent variable. A relatively big t-value means that the predictor variable has a large impact on the dependent variable. Thirdly, the standardized coefficient (β) measures the contribution of the predictor variable in terms of standard deviations. If the predicted variable increases by 1 standard deviation, the dependent variable is increased by the value of β. The number of stars indicates the level of significance.

Table 5 – Regression analyses explaining investors’ esteem needs

Question Factor (rotated) ‘esteem needs’ Constructed variable ‘esteem needs’ Coefficient (B) (t-value) Standardized coefficient (β) Coefficient (B) (t-value) Standardized coefficient (β) 4 - Education B = 0.18** (2.025) β = 0.14 B = 0.12** (2.011) β = 0.14 7 - Capital B = 0.26** (2.136) β = 0.15 B = 0.15** (1.963) β = 0.13 Constant -0.84* 2.45* Adjusted R Square 0.034 0.029

* is significant at the 0.01 level (2-tailed) ** is significant at the 0.05 level (2-tailed)

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However, the model in table 5 explains just 3,4% of the variance (Adj. R Square = 0.034) in the dependent variable ‘esteem needs’. This means that there are either additional reasons or different characteristics outside those that we have used for the regression analysis to explain investors’ esteem needs exist, or that there is just no better explanation than this model to assess the investor’s utility curve.

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Table 6 – Regression analyses explaining investors’ self-actualization needs

Question Factor ‘self-actualization

needs’

Constructed variable ‘self-actualization needs’ Coefficient (B) (t-value) standardized coefficient (β) Coefficient (B) (t-value) standardized coefficient (β) 4 – Education B = -0.20** (-2.350) β = -0.15 B = -0.14** (-2.417) β = -0.16 6– Parenthood B = -0.12*** (-1.739) β = -0.11 B = -0.08*** (-1.759) β = -0.11 7 – Capital B = 0.11* (1.624) β = 0.11 B = 0.08* (1.655) β = 0.05 12 – Knowledge B = 0.51*** (7.179) β = 0.48 B = 0.35*** (7.106) β = 0.48 13 – Experience B = 0.01 (1.569) β = 0.11 B = 0.01 (1.548) β = 0.10 Constant -1.06* 2.54* Adjusted R Square 0.259 0.255

***significant at the 0.01 level (2-tailed) ** significant at the 0.05 level (2-tailed) * significant at the 0.1 level (2-tailed)

4.3 The satisfaction of investors’ esteem needs

The factor analysis in table 7 shows whether investors distinguish between the type of investments they want to make that may possibly satisfy their esteem needs. As said before, in this study, only projects that deal with ‘sustainability’, ‘care’ and ‘charity’ are chosen. Question 21 to 29 from part III of the questionnaire, called ‘Esteem needs 2’, is used for the execution of this factor analysis. Table 7 shows the results of the analysis, which is also rotated by the orthogonal rotation method VARIMAX.

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variable ‘sustainable building projects’ on a fourth factor. However, a new factor solution, presented in table 7, had to be derived, since the communality of variable ‘art and culture’ was not sufficiently high (0.49) to retain in the analysis. The deletion was further supported by a very low Cronbach’s alpha (.43) for questions 26 and 27.

The new factor analysis gave significant loadings on three distinct rotated factors. The first factor is labeled as ‘charity’, the second as ‘care for family’ and the third one as ‘concentration of capital’8. Question 27 had no significant loading on one of the factors and is, as a consequence, excluded from the analysis.

The communality for variable 1 is less than (0.5), which is the minimum limit for retaining items. However the scale has a Cronbach’s alpha of (.70), which is high enough to use the scale/factor for further analyses. The other factors, ‘care for family’ and ‘concentration of capital’ are respectively supported by a sufficient Cronbach’s alpha of (.88) and (.85) (appendix 2.0, table 3).

8_{Question 28 and 29 give negative loadings on the unrotated factor 2. This means that when investors indicate they}

are care less with regard to their future generation(s) and their legacy, the score on factor 2 will increase. The rotated factor, however, has clearly a positive loading on factor 2, meaning the opposite. The score on this factor will be higher when investors indicate that they do care for future generation(s) and their legacy.

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Table 7 - Factor analysis for measuring investors’ preference for investments, projects and services to satisfy their esteem needs

Question Unrotated Component Matrix Rotated Component Matrix (VARIMAX)

Communalities

Factor 1 Factor 2 Factor 3

Factor 1 Factor 2 Factor 3 Factor 1,2 and 3

21 0.49 0.03 0.51 0.70 0.05 0.01 0.49 22 0.66 0.03 0.53 0.83 0.14 0.09 0.72 23 0.68 0.12 0.43 0.78 0.12 0.22 0.67 24 0.57 0.56 -0.46 0.06 0.06 0.92 0.85 25 0.65 0.55 -0.38 0.18 0.09 0.91 0.86 27 0.44 -0.00 -0.03 0.26 0.25 0.25 0.19 28 0.61 -0.65 -0.29 0.12 0.93 0.05 0.88 29 0.63 -0.62 -0.31 0.11 0.93 0.09 0.88 Constructed variable ‘charity’ 21-23 3.14 Constructed variable ‘care for family’ 28 & 29 3.29

Constructed variable ‘concentration of capital’ 24 & 25 2.42

Since we would like to know by what type of investments, projects or services investors’ esteem needs are satisfied, a bivariate correlation between the rotated factor and constructed variable ‘esteem needs’, and the three other rotated factors -‘care for family’, ‘charity’ and ‘concentration of capital’- is executed. Table 8 presents the outcome.

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Table 8 – Bivariate correlations between investors’ esteem needs and factors ‘charity’, ‘care for family’ and ‘concentration of capital’

Factor (rotated) ‘esteem needs’ Constructed variable ‘esteem needs’

Coefficient (r) p-value (p)

Factor (rotated) ‘charity’ r = 0.54*

p = 0.00

r = 0.55*

p = 0.00

Factor (rotated) ‘care for family’ r = 0.15** p = 0.06 r = 0.15** p = 0.05 Factor (rotated) ‘concentration of capital’ r = 0.07 p = 0.41 r = 0.07 p = 0.41

* Correlation is significant at the 0.01 level (2-tailed) **Correlation is significant at the 0.1 level (2-tailed)

There is a significant positive correlation between investor’s esteem needs and the factors ‘care for family’ and ‘charity’. There was, however, no significant relation between the rotated factors ‘esteem needs’ and ‘concentration of capital’. As a consequence, I draw the conclusion that investors mainly try to satisfy their esteem needs by investing in charity, and by taking care for their family 9.

V Conclusions and implications for financial institutions

The results of this study have shown that, in general, relatively rich investors do not base their investment decision merely on the expected risk and return of a particular investment. Additional reasons, which are in general not-financial, could well be involved in the investor’s investment decision-making process. Relatively rich investors are likely to use their capital for other

9_{A significant positive correlation of (0.16) at the 5% level between the rotated factor ‘charity’ and question 30,}

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purposes than merely increasing their wealth. This study demonstrates that these other purposes are the satisfaction of the investor’s esteem and self-actualization needs.

It is important for financial institutions like Schretlen & Co., and the investment community in general, to take into account the client’s reasons and wishes in order to satisfy the client’s needs. The key is to develop a comprehensive framework that investment managers can adhere to in serving their clients consists of knowing precisely what needs investors have, with whom these needs emerge and how these needs can be satisfied.

As in line with the theory of De Brouwer (2009), this study operationalizes (and detects two) non-financial needs that investors want to satisfy by means of their investments. These are their esteem needs and their self-actualization needs. Furthermore, the results show that some relatively rich investors find it still important to have a return on their investments, irrespective from the initial purpose of those investments.

De Brouwer (2009) assumed, in correspondence with earlier Behavioral Portfolio Theories (Khaneman and Tversky, 1979; Shefrin and Statman, 1997), that investors’ needs have to be addressed in the investor’s portfolio layer by layer. On the one hand, this is true, since the respondents clearly indicate that they only prefer to invest for other purposes after their financial needs are fully satisfied. This is further confirmed statistically by the clear separation between the factors ‘esteem needs’ and ‘the importance of return’. It implies that some investors think that it is possible to get a return on investments that are primarily not meant for making returns but for increasing esteem. As a result, investors financial needs, the bottom three layers of the MaPT pyramid, and investor’s esteem needs, the fourth layer of the pyramid, are satisfied hierarchically for some relatively rich investors but not for others. This is in line with the fact that a positive significant correlation exists between the variable ‘the importance of the tax benefit by investing in charity’ and the factor ‘charity’ (note that investing in charity satisfies investor’s esteem needs). So, financial advisors must certainly take into account that some investors consider it is important to have a return on investments that also serve the purpose to satisfy the investor’s esteem needs.

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investor’s self-actualization needs and financial needs could be well addressed simultaneously in the investor’s portfolio.

Regarding the question what type of investor is attached most to respectively esteem needs and self-actualization needs, I can conclude that the wish of investors to satisfy their esteem needs emerges primarily when they get richer and are better educated. Self-actualization needs come forward in investors that are relatively rich and have investment-related experience, and in particular investment-related knowledge. The emergence of the investor’s self-actualization needs is negatively influenced by an increase in the number of children and the investor’s level of education.

This study further examined the way how investors’ esteem needs are satisfied. Esteem needs are primarily satisfied by investments that deal with charity, but also by paying for services aimed at helping offspring and family in other ways than purely financial. However, it is noteworthy that for relatively rich investors that invest in charity, the tax benefit is still relevant in their investment decision-making process.

Since investors’ self-actualization needs are satisfied by the investment process itself, this study did not give any attention to how those needs may be satisfied. However, it became clear that some investors are eager to learn from the choice of their investments in order to get a better understanding about how the market works. So, for investment managers it might be important to inform their clients repeatedly about the performance of the client’s portfolio, and in particular by what development(s) the performance is influenced the most.

VI Limitations and recommendations

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be highly collectivistic, it then would be more relevant for those investors to satisfy their esteem needs. Further research can examine these, and other assumptions, to find out if and how the difference in cultures will influence the emergence of investor’s financial and non-financial needs.

Another limitation of this study is that the survey does merely incorporate relatively rich investors. On the hand, this has increased the chances for investors to actually strive to satisfy other needs than just their financial needs. On the other hand, we are now only able to apply the results of this study to a group of investors that is considered as relatively rich. A good research opportunity would be to perform this research again, but then with another sample that is probably more in line with the general population of investors.

The last limitation concerns the validity of this study. For this study the concepts ‘esteem needs’ and ‘self-actualization needs’ are measured by respectively 4 and 5 questions. These questions are based on literature and are expected to be a good measure for measuring investors’ esteem needs and self-actualization needs, also because each concept is supported by a sufficient Cronbach’s alpha. However, other researchers may still raise other questions that might measure these concepts further. As a result, their conclusions may differ from this study’s results, while both studies claim to measure the same. So, the validity of this exploratory research on the MaPT may be confirmed further.

VII Acknowledgments

In this section I would like to thank everybody who has supported and helped me in writing my Master thesis. I want to mention a few of them explicitely. Firstly, I want to give my special thanks to my supervisor Dr. J. H. von Eije. I am very grateful that, during the process, I could always count on his support, suggestions and improvements. Especially his sincere optimism about a good end result and his expansive critical remarks have made this thesis a better thesis than I could have written on my own. What could one want more from a supervisor.

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‘Team Financiele Structurering’, Schretlen & Co. and the ‘Beleggingscompetence’ from Rabobank Private Banking, especially J.J.P.M. de Dood, who was always there to listen to problems and help finding solutions for them. It was very pleasant to work with all of you and to learn from you. Thank you very much for the time I have spent with you at Schretlen & Co., it has definetely made the experience of writing this thesis more interesting and bearable. Lastly, I really want to thank the clients of Schretlen & Co. who took the time and effort to fill in my questionnaire. Without their help none of this was possible.

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