Abstract
In this paper, we extend Maslow’s need hierarchy theory and the two-level optimization approach by developing the framework of the Maslow portfolio selection model (MPSM) by solving the two optimization problems to meet the need of individuals with low financial sustainability who prefer to satisfy their lower-level (safety) need first, and, thereafter, look for higher-level (self-actualization) need to maximize the optimal return. We illustrate our proposed model with real American stock data from the S&P index and conduct the out-of-sample analysis to compare the performance of our proposed Variance-CVaR (conditional value-at-risk) MPSM with both traditional mean-variance and mean-CVaR models. Our empirical analysis shows that our proposed Variance-CVaR MPSM is not only sustainable, but also obtains the best out-of-sample performance in the sense that the optimal portfolios obtained by using our proposed Variance-CVaR MPSM obtain the highest cumulative returns in the out-of-sample period among the models used in our paper. We note that our proposed model is not only suitable to individuals with low financial sustainability, but also suitable to institutions or investors with high financial sustainability.
Highlights
There is an increasing number of organizations, especially governments, who take financial sustainability into account
De Brouwer [16] offers an alternative formulation of the behavioural portfolio theory via the theory of needs, and Colson et al [17] develop the approach for the two-level optimization estimation. We extend their theories by developing the framework of the Maslow portfolio selection model (MPSM) and solving the two optimization problems to meet the need of individuals with low financial sustainability who prefer to satisfy their lower-level need first, and thereafter, look for higher-level need to maximize the optimal return
Our empirical analysis shows that our proposed Variance-conditional VaR (CVaR) MPSM is sustainable, and obtains the best out-of-sample performance in the sense that the optimal portfolios obtained by using our proposed Variance-CVaR MPSM obtain the highest cumulative returns in the out-of-sample period among the models used in our paper
Summary
There is an increasing number of organizations, especially governments, who take financial sustainability into account. We extend their theories by developing the framework of the Maslow portfolio selection model (MPSM) and solving the two optimization problems to meet the need of individuals with low financial sustainability who prefer to satisfy their lower-level (safety) need first, and thereafter, look for higher-level (self-actualization) need to maximize the optimal return. Our findings support our conjecture that individuals with low financial sustainability who prefer to satisfy their lower-level (safety) needs first, and, thereafter, look for higher-level (self-actualization) needs do prefer our proposed models to both MV and M-CVaR models. We find that institutions or investors with high financial sustainability who prefer to look for higher-level (self-actualization) needs first, and, thereafter, satisfy their lower-level (safety) needs prefer our proposed models to both MV and M-CVaR models in our illustration.
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