CHAPTER 10

Motivation and Satisfaction

Lewis J. Altfest

Associate Professor of Finance, Pace University

INTRODUCTION

This chapter focuses on the linkages among motivation, satisfaction, and personal finance. Motivation provides the incentive to take certain actions. For many, the actions often coalesce around establishing certain goals. Satisfaction can be viewed as the feelings of pleasure surrounding the movement toward and the achievement of those objectives. Personal finance has traditionally made those goals tangible by attempting to measure them using objective values such as money. Financial planning is fundamentally concerned with the process that directs people to efficient progress toward reaching their goals or objectives.

Financial planning in practice includes the realm of behavioral economics and behavioral finance. It deals with how people really think and act as opposed to the classical economics rational man theory that indicates how they should act. The behavioral approach takes its cues from psychology as well as economics and finance.

The chapter has the following organization. It begins by examining the roots of economic theory, particularly Modigliani's Life Cycle Theory, which serves as a basis for personal financial planning. This chapter then covers behavioral finance. This is followed by a detailed discussion of what motivates people beyond money. This part of the chapter is an empirical analysis based on the seminal work by the psychologist Abraham Maslow and his hierarchy of needs theory of motivation. Next, the chapter brings this psychological theory into the financial realm. The chapter ends with a summary and conclusions.

CLASSICAL ECONOMIC MOTIVATION

Classical economic theory (i.e., the foundation of standard or traditional finance) provides a broad beginning framework for understanding what motivates people. Its most basic form is the economic theory of consumer choice. The theory of consumer choice indicates that people are motivated by the goal of achieving the highest level of satisfaction they can. They do so by purchasing the greatest amount of goods and services they can afford.

In a one-period model in which the consumer spends all money available in the current year, the consumer selects only the most satisfying bundle of goods. The particular bundle of goods selected depends on the preferences of the individual. For example, one person may spend more on clothing and an expensive car while another may enjoy eating out often and buying costly electronic leisure equipment. Each, of course, is limited by the money he or she earns, which is called the budget constraint. The amount of satisfaction received cannot be measured exactly but preferences are obtained by rank ordering each alternative bundle.

People may not spend all their money in the period they receive it. They have the option of consuming it over a longer period of time, which is called intertemporal choice. In other words, they can save and invest part of their income for use later. Investing money not only postpones the consumption outlay but also increases the amount available as given by the return on the amount invested. Others may borrow money temporarily to spend more than their current income.

Some assumptions in the model are that consumers get additional satisfaction from buying more goods and that they act rationally. Rationality can mean they perform logically in value-oriented quantitative terms. As discussed later, people do not always act in a logical way that is fully consistent with achieving their goals. They also may need help in becoming more efficient consumers. Another problem can be the treatment of families. While individuals may have their own preferences, they are often assumed to act as if they have the same preferences as those for the household taken as a whole.

Modigliani (1980) made famous an applied version of the multiperiod model called the Life Cycle Theory. Before his works, economics placed more stress on single-period income received and spent. According to Modigliani, human beings are motivated to become planners. That is, they project their cash inflows from salaries, investment income, and other sources and determine the amount of expenditures they can afford. Underlying the theory is the goal of maximization of resources during one's life cycle. This implies dying with no savings. Modigliani assumes that people attempt to equalize their expenditures each year over their life cycle. To support these expenditures in retirement when no income is earned, individuals have to save money earlier.

Modigliani's model has weaknesses. For example, the model does not include risk: No one can predict with certainty such things as their job-related or investment income, costs, or longevity. Instead, they must use estimates. Additionally, financing a level standard of living over time is difficult if not impossible because banks will not lend to fund lifestyles early in careers when income is low. As part of their estate planning, some people want to leave money to their children or others instead of dying broke. Not all people save money but use government support, such as Social Security, to fund retirement living closer to the one-period model.

Nonetheless, when taken as a whole, Modigliani's approach has become the most popular economic model of rational human household behavior. Financial planners and others still find value in this approach even with many of the model's weaknesses. From a personal finance standpoint, his model with its emphasis on forward thinking can be viewed as the forerunner of the field of personal financial planning.

BEHAVIORAL ECONOMIC MOTIVATION

A strictly orthodox rational approach to planning and investing has limitations. Compared to man as machine behavior, which is often called “economic man” or “homo economicus,” people make mistakes in such areas as having correct recall of previous occurrences or reacting emotionally when it is not in their long-term interests to do so. Instead of maximizing as called for in economic theory, they may come up short, preferring a less rigorous satisficing approach based on bounded rationality (Simon 1955). That is, an individual may receive more satisfaction from a less intensive, less than optimal decision process, in which that person acts as a “ human being” and selects the satisfactory option. Tversky and Kahneman (1981), who are noted behavioral psychologists, popularized human inconsistencies through their heuristics (i.e., mental shortcuts or mistakes) and biases. The differences between economic man as he should be according to standard finance theory and the way people actually act led to behavioral economics and finance.

Behavioral economics has given rise to a modification of Modigliani's Life Cycle Theory, which can be called the behavioral life cycle hypothesis. Instead of one choice as in classical theory, some researchers view the individual as having many selves. Multiple selves, in essence inner voices exposing conflict in selection, create a less concrete form of motivation. On the other hand, multiple selves allow insight into self-control bias, which is decision-making involving restraint or judgment that is distorted or inconsistently applied according to classical economic thought. Bias is an inclination of temperament outlook to present or hold a partial perspective at the expense of (possibly equally valid) alternatives in reference to objects, people, or groups. For example, if classical economics theory is right about individuals having one fixed preference, why does the need exist for exercising control, which implies inner conflict? Also, people make different choices at different times. Overweight people sometimes avoid high caloric deserts and at other times they indulge. Which self wins may come about through cyclical changes in willpower at different times, a change in circumstances, or both.

An application of motivation and self-control about which people are concerned is in the realm of personal financial planning. Thaler and Shefrin (1981) make a prominent adjustment to established economic theory by assuming that people have two preference systems that are independent and can conflict at a point in time. They call this a two self economic man. According to Thaler and Shefrin, people have conflicts between short- and long-run motivations. The authors hypothesize that individuals have planner and doer sides. The planner is farsighted and motivated by lifetime satisfaction. The doer is concerned about current satisfaction and is completely selfish and myopic.

The approaches taken to control the doer's lure can be: (1) to save the amount needed automatically, which can overcome the superior short-term pleasure that certain people get from spending today; (2) to monitor savings periodically using budgets; (3) to reduce the amount of pleasure for outlays by establishing other restrictions; or (4) to increase rewards for good behavior. At an extreme, an entire set of doer actions can be eliminated through, for instance, keeping credit cards and large sums of cash at home.

Thaler and Shefrin's (1981) approach modifies the standard rational model. Classical theory might say intention and knowledge of what is needed and outcome are the same, while individuals know the temptation to have pleasure today can affect lifetime goals. Thaler and Shefrin (p. 32) say that in their modification “people will rationally choose to impose constraints.”

Thaler and Shefrin's (1981) model deviates markedly from Modigliani's (1980) model. It more closely highlights those characteristics of individuals that can weaken the singular goal and undercut the money wealth maximization hypothesis of neoclassical theory. It indicates that people respond favorably to help control their short-term temptations. Using behavioral techniques including financial advisors can help Modigliani's life cycle hypothesis come to fruition.

Later, Shefrin and Thaler (1988) specifically analyze Modigliani's life cycle theory and modify it for what they view as realistic human conditions. Their tests of the hypothesis show mixed results. For example, some tests do not support the notion that people plan in the life cycle manner. Improved outcomes could occur by incorporating behavioral characteristics, specifically self-control, mental accounting and framing, which are typically left out when using a classical economic approach. These modifications are similar to those of Fisher (1930), who had five variables entering into personal savings decisions: self-control, foresight, habits, expectations of mortality, and love for posterity.

Shefrin and Thaler (1988) elaborate on self-control and distinguish between self-control and ordinary choice. Self-control requires a “feeling of effort,” which refers to mental rather than physical effort. Self-control involves three elements: internal conflict, temptation, and willpower. In effect, self-control involves a choice between pleasure today and higher benefits in the future. The conflict is one of an emotional choice for gratification now (called the short-run doer) versus (economically) rational choice for the individual's future (called the long-range planner). People need to exert willpower to resist temptation.

Mental accounting can be viewed as compartmentalizing inputs mentally that an economically rational person would view as equivalent to one another but in practice individuals treat as deserving of differing actions. People attempt to develop limitations on their actions (impulses) in the most painless way possible. They try to find rules that can evolve into habits, specifically habits that require minimum conscious thinking in an area in which thinking about that subject is typically painful.

Shefrin and Thaler (1988) separate individual wealth into mental accounts of current spendable income, current assets, and future income. Placing money in different accounts results in different outcomes. For example, given a desire to spend a withdrawal from an available current income account today will result in different spending or saving decisions compared with placing the cash in a pension account. That is true even if no tax penalty exists on a pension withdrawal. Because withdrawal from a pension may represent a more serious incursion, the pension serves as an impulse control device.

Mental accounting is a subset of Tversky and Kahneman's (1981) framing. This final characteristic indicates how an individual communicates something that can affect the subsequent decision made. For example, if a financial planner tells a client that he made an ill-advised financial decision, the planner is less likely to get the client to make the correct decision in the future. The authors conclude that people do not act with machinelike logic but employ imperfect rules of thumb. Following heuristics or rules of thumb results in actual behavior that is not economically rational behavior as to how people should act.

Shefrin and Thaler (1988) suggest that analysis and testing should go forward using actual, not assumed, behavior. The broader understanding of human behavior, which would be applied to behavioral economics, could help people operate more efficiently according to their goals. For instance, financial professionals could expand their use of mental accounting techniques to help people save more money, which is often in their best interest to do.

MASLOW'S HIERARCHY OF NEEDS

Behavioral economics questions the assumption of a fully rational, emotionless, profit-maximizing individual. It often leaves in place the particular individual's desire to maximize satisfaction with materialism as a key part. Humanists extend the scope to emphasize higher forms of satisfaction that have little or even no concentration on materialism. One of the most creative humanists is Abraham Maslow. Maslow is best known for his hierarchy of needs theory of human motivation (Maslow 1943; Maslow and Frager 1987). In developing this theory, Maslow interviewed others and incorporated believed characteristics of leaders in society from their biographies and generalized from the data received.

Maslow thought of individual makeup in a holistic fashion, something that is practiced in personal financial planning today. In other words, he regarded the individual as fully integrated because the whole individual is motivated, not one part at a time. For example, if people have insufficient social interaction, it affects many or all of their functions, not just their need for human discourse.

According to Maslow, many motivations that people have are not so important in themselves but serve as paths to ultimate goals, desires, or needs. Individuals are unaware of all of their motivations because some are unconscious. Yet, they universally share the same ultimate goals or objectives despite having differing short-term wishes. Maslow differs from many psychologists who focus on the factors that make individuals unique and enable them to satisfy their goals. At the same time, motivations for striving to attain a goal may have various underlying reasons. For example, someone may want to get an advanced degree in business to impress, to be intellectually more sophisticated, to advance in business, or to earn more money.

Motivation, according to Maslow, is an underlying force that is always present, with many dimensions. After satisfying one goal, the individual moves on to another. Isolating drivers is difficult because they are multifaceted in their impact and overlap with other drivers.

In contrast to isolating drivers, Maslow indicates that people should generalize about fundamental goals and needs. He believes that environment influences their behavior but does not displace their own underlying motivations. While people can usually be thought of as an integrated whole, they do not always act that way. Not all the things that people do are motivated by their needs.

Maslow's hierarchy of needs is a compendium of needs starting from the most fundamental and moving up to higher needs once each is satisfied. That is, higher needs emerge after achieving more basic goals. If individuals have not satisfied higher needs, they focus their attention on doing so. Maslow begins with the basic needs hierarchy. The preconditions for the basic needs include the freedom to speak, defend, express, and seek information. Exhibit 10.1 provides a diagram of the entire process. A brief description of each need follows.

Physiological Needs

Individuals must satisfy the underlying paramount need for food. They also must be able to drink water, sleep, feel safe, and perform bodily functions. If physiological needs are unsatisfied, they become dominant and the other needs are dormant. If one is hungry, nirvana can be a full stomach.

Safety Needs

The next higher step after meeting physiological needs is safety. Safety encompasses many different items including protection from bodily harm, security, stability, lack of fear and anxiety about such items as health, and the ability to finance the most basic economic needs. More broadly, safety needs include possessing a secure job, having insurance against potential losses, and an emergency fund. Maslow views religion as partly a safety need that helps people integrate the world around them.

Belongingness and Love Needs

Maslow presents belongingness and love immediately above safety needs. Here, people place their needs for love, affection, and sense of closeness with others. Thus, they may include friends, mates, children, and more broadly belonging to groups as well as giving and getting affection.

Esteem Needs

Esteem needs refer to having a good opinion of oneself and being viewed favorably by others. Such factors include achievement, competency, strength, confidence, and independence in formulating one's opinion. Other esteem needs include reputation, status, and appreciation. When a person is satisfied with his self-esteem, he feels confident, strong, and capable. These factors can be hard to achieve and therefore some people can feel weak, insecure, and neurotic. Maslow pays respect to other thinkers, warning of dependency on the views of others, and emphasizes earning respect from others instead of gaining fame and celebrity for little justification. In a survey of psychology in relation to economics, Earl (1990) indicates that conspicuous consumption in relation to Maslow's esteem needs varies by individual. Those who are insecure may lean on conspicuous consumption, as is stereotypically assumed for the nouveau riche.

Self-Actualization

Self-actualization is the highest level need. At this point a person has satisfied all the other needs including having achieved self-respect and recognition. However, people desire more—a cause to which they can dedicate themselves or something that helps them realize their potential. The items that people focus on to achieve this varies considerably and examples include athleticism, artistic ability, raising a family, and religious devotion. Progressing through these states generally requires independent thinking and is challenging.

Maslow discusses two other needs. One is a cognitive need to know, understand, and be curious. People also have an aesthetic need to seek out beauty. Some of Maslow's followers add these as separate needs that may be conscious or unconscious. Across cultures, basic needs are more common than higher level ones. This is understandable because people in less developed countries do not progress far up enough in the hierarchy to reach higher level needs.

CRITICISM OF MASLOW'S HIERARCHY OF NEEDS

Critics of Maslow's hierarchy of needs theory voice many objections including the following.

Hierarchical Values Vary by Country

Maslow's hierarchy is expressed using U.S. values. In the United States, people place great emphasis on the individual, material success, individual expression, and reaching for personal goals. In Japan, however, a greater emphasis focuses on group goals and risk aversion, while deemphasizing individual opinions and creative lifestyles. Other countries may have a more doctrinaire religious approach or view work as a necessary evil compared to the United States, where people seek partial fulfillment through work.

Hierarchical Values Vary by Interest

Beliefs in rigid hierarchies of uniform values within the United States are invalid. Instead, values within our country can vary considerably. Materialistic preferences can range from working almost all the time and being able to afford material possessions and expensive vacations to selecting the minimum salary needed to allow for funding life's pleasures. For example, an artist may have a very low standard of living to allow for creative expression. People may engage in altruistic acts, a higher level need, even though they have not satisfied their love needs.

Hierarchical Values Vary by Income Strata

Drive, intelligence, values, luck, and background are all among the factors that enter into the positioning of people within social classes. A survey of values by Gratton (1980) by class strata shows the following needs/priorities:

Class	Needs
Middle class	Esteem and self-actualization
Working class	Esteem and belonging
Lower class	Physiological and belonging

Needs Are Not Fully Satisfied Separately

With the exception of physiology, needs are not like glasses of water that get filled up, with individuals then moving on to the next need. Even if they were, events can intervene such as sickness and divorce that bring people back to previously satisfied factors. Instead, needs should be grouped together in seeking satisfaction.

Testing Standards Are Not Strong

Much scientific testing occurs under tight methodological standards. Maslow presents an all-encompassing theory with a relatively weak methodology. Generally, he uses his own observations and beliefs to personally interview or study the biographies of leading past and then-resent dignitaries. Maslow's own perceptions may have tainted the conclusions.

Criticism of Self-Actualization

Self-actualization, which involves making ongoing moves toward or reaching an individual's potential, has its own list of criticisms.

Testability

Self-actualization exists principally in the minds of those engaged in that activity. Unlike other hierarchical levels, it does not have clearly definable characteristics. Outcomes do not necessarily lead to an ultimate end, just more searching and satisfaction in performing the search. Further, no criteria are available for distinguishing between satisfaction and frustration. Consequently, testability may be difficult or impossible.

Too Stringent

The theory suggests that people who do not self-actualize are not truly satisfied. Yet, the vast majority of people may not have self-actualization as a priority or even engage in this step. These people upon retirement participate in discretionary activities they find fruitful and describe themselves as happy. Furthermore, the theory is based on an analysis of especially gifted people who exhibit great achievement and psychological health. This may not reflect a standard that most individuals can achieve in the real world.

Overall Summary and Appraisal

Maslow applies a step-by-step approach to progress toward fulfillment of personal goals. He describes how individuals satisfy their needs in motivational terms. The process begins with physiological needs that people require to keep alive. The next step involves safety goals in which people try to achieve freedom from harm and feelings of insecurity. They then seek belongingness and love based on social needs. The penultimate step involves achieving self-esteem and the esteem of others.

All steps are expressed as deficiency needs and each must be fully satisfied to be able to move to the next step upward. The final need, self-actualization, is the one that is not a deficiency but a goal to develop the capacity to maximize and achieve potential.

On balance, Maslow has created a highly powerful theory. The fact that it may have limitations in regard to its hierarchical nature or its perceived uniformity of values throughout the world may not be that important. Evidence exists that Maslow himself knew of these weaknesses, for example in selection of subjects (Maslow 1968). Theories seldom fully comply with reality.

Maslow provides a simple structure that resonates with many people. Individuals move up in interests and goals once they satisfy more basic needs. People can aspire to higher level self-actualization goals once they meet their basic needs. The fact that the general public and many professionals in psychology, management, economics, and finance support this theory attests to its popularity.

HIGHER LEVEL MOTIVATION

Maslow's hierarchy of needs is appealing to many people, especially in the United States, because it is consistent with the goal of climbing the ladder of success. The highest part of its hierarchy, self actualization, may be attractive but may be less clearly defined as to what it comprises and whether most people require it for long-term satisfaction. The following discussion begins with life satisfaction and proceeds to further analyze Maslow's higher level needs and his belief in dual selves with its relationship to higher level needs. This section sets the stage for a discussion on humanism.

Satisfaction

Satisfaction is closely attached to motivation. It emerges when something that people want to have happen does so. Satisfaction is the utility part of all motivational approaches already discussed. It can be used, for example, to express pleasure at eating a good meal when someone is very hungry. In that application, satisfaction applies to a basic need in Maslow's hierarchy. After exploring the term satisfaction, its meaning, and how to distinguish it from other related terms, the discussion then turns to identifying the items that bring about life satisfaction.

Satisfaction refers to the fulfillment of one's wishes, expectations, or needs or the pleasure derived from this. In an economic sense, satisfaction represents the pleasure arising from achieving part or all of a goal. Further discussion focuses on broader goals that result in the term “life satisfaction.” Life satisfaction is an integration of the positive and negative occurrences leading to an overall personal assessment of life's experiences resulting in relative degrees of fulfillment.

Life satisfaction differs from well-being, which includes both cognitive (mental) and emotional terms (Lucas, Diener, and Shu 1996). Some areas overlap in that mental processes can influence emotional ones and vice versa. However, life satisfaction tends to be principally a mental process. This suggests that the term fits an economic and finance orientation more closely and is less influenced by people's momentary moods. Life satisfaction can provide both a more consistent and objective opinion of people's perception of their long-term status.

Self-esteem is highly correlated with life satisfaction while happiness and mood as more emotional transitory terms are less so. For example, a person can be happy at a moment in time but be far away from achieving life satisfaction. On balance, life satisfaction best fits the terms of this chapter overall and Maslow's higher level needs in particular.

Self-Actualization

Self-actualization is the ultimate step in Maslow's hierarchy of needs. At this level people are seeking personal growth and fulfillment. Personal growth is striving to become a better person. Fulfillment is an inner satisfaction not intended principally for external recognition. Maslow (1968) received his insights by viewing exceptional people and many others do not rise to this level. However, if fulfillment comes from some basic desires such as charitable pursuits or helping to raise well-adjusted children, this level may include more people. Depending on the goals, the areas may require further material discretionary expenditures, not just time and effort, which in strict financial terms are not costly.

Maslow and the Dual Self

After the hierarchy of needs became popular, Maslow wrote about multiple selves and indicated that individuals have higher and lower inclinations. He differentiated between their potential (i.e., what they strove for) and what they were presently (i.e., their current reality). He said people have deficiency motives and personal growth motives. Their higher self consists of pure principals such as integrity, truth, and love. The lower self, which is more consistent with the standard finance approach, is attracted to pleasure and self-interest. Maslow, by appealing to higher needs, promoting fairness, and engaging in satisfying work, was challenging traditional economic thought of selfish pleasures and emphasizing altruistic behavior.

Characteristics of the Self-Actualized

According to Boeree (1998) and Mcleod (2007), Maslow established certain characteristics of people who are candidates for self-actualization. Some of these characteristics include:

• Seeing things as they are, including uncertainties
• Accepting one's own and other peoples' personalities
• Being spontaneous
• Not focusing on oneself but dealing with real issues
• Being comfortable alone
• Having deep personal relationships
• Thinking independently and having independence from social pressures
• Being humorous, not hostile
• Having humility and respect for others
• Incorporating strong ethics and morals
• Being creative
• Engaging in many peak experiences
• Focusing on concern for others
• Enjoying life experiences
• Having democratic attitudes

HUMANISM

The humanists provide an even broader perspective than the behaviorists. As least in part, behavioral economists retain the economic discipline's emphasis on material values. Humanistic economics in contrast employs behavioral characteristics but generally moves beyond largely materialistic goals. Humanists indicate that some objective values such as morality, human rights, and concern for others focus on individual potential. For these believers, life satisfaction comes from achieving purer goals.

As one of the most famous humanists, Maslow's research influenced many people. His work consists of two major parts: (1) deficiency goals, which are set up through hierarchical levels, and (2) higher level, more humanistic goals on which people concentrate after achieving the deficiency goals. For the most part, these have been discussed already.

Lutz (1999), another prominent humanist, provides a perspective based on Maslow. He indicates that humans have conflicting desires: Some are more basic (deficiency motivation) and others involve personal growth including love, truth, and integrity. Lutz, who emphasizes altruistic behavior, indicates that pleasure maximization and selfish behavior can inhibit growth of personality. Lutz (p. 318) states, “Psychologically a preoccupation with materialism can be explained in Maslowian terms as the result of stunted growth brought about by a blocked security need.”

Lutz (1999, p. 318) indicates that for people it “is not so much the optimal satisfaction of our desires to consume but the development of a meaningful life embedded in human community and the natural environment.” Maslow stresses that the higher human needs of social esteem and self-respect cannot be satisfied through purchases. Lutz's point of view as a humanist is that too much focus on consumption could restrict the climb for self-esteem. Consumerism retards the progress of humanity. Lutz believes that passing Maslow's security need stage in particular would allow concentrating on higher social and moral needs.

Heylighen (1992) indicates that the person who is a self-actualizer needs to be receptive to new ideas, have a realistic perception of reality, be enthusiastic, and want to learn more about unknowable items. Self-actualizing represents a particular type of maximally healthy personality. This suggests that many or most people will not achieve this state. Each individual has much hidden potential. If they have not met the highest needs, people will not really be happy. This negative occurrence takes place even if they receive respect from peers, enjoy an inner sense of personal achievement, and have a loving family. Such individuals will still experience a feeling of boredom and meaninglessness because they have not achieved all their desires. Heylighen maintains that people must be made aware of their need for self-actualization.

According to Heylighen (1992), self-actualizers are not afraid of being wrong when presented with problems. Many may be unconventional in their thinking or creativity. They accept others, have a sense of morality, are patient, and can focus on a problem. Self-actualizers can make decisions themselves, engage in value detachment, feel for others, be sincere, and relate only to a selected group of people. Heylighen views Maslow's theory as not well structuredand maintains that theory and observations are not always the same. Self-actualization could come from solving a frustration as well as seeking future gratification. Humanists moved even farther away from orthodox economics in their promotion of unselfish behavior, such as concern for others and doing what is ethically correct.

MASLOW AND INVESTMENT MANAGEMENT

Before moving on to integration of motivation, humanism, and personal finance, discussing Maslow's hierarchy of needs and its relationship to investment management could be useful. Shefrin and Statman (1994) already had presented behavioral portfolio theory that extended finance theory and investor motivation beyond the established risk-return model. De Brouwer (2010, 2012) drew parallels between each of Maslow's levels of human needs and appropriate investments for that level. For the most basic physiological needs given the high cost of falling short, Maslow indicates that people should probably hold money in cash or a money market account. For safety needs, they should place at least a portion in low risk investments. For social needs, at least for close personal relationships, individuals may move beyond self-interest to those of the family. They should be separated and base their investments on each specific family goal including such factors as time horizon and relative importance. More risk is called for than in previous levels.

For esteem needs the investor's risk tolerance is considered as in traditional theory. Where esteem incorporates separate goals each may have a different investment vehicle, with mutual funds perhaps having a role. Humanistic influenced self actualization may take the approach of forming a tailored portfolio, thereby adding an element of self exploration and development of a successful portfolio. Increased levels of risk are considered as one moves to higher risk.

De Brouwer (2010) calls the result Maslowian portfolio theory. His purpose is to show that another dimension exists beyond risk and return and that psychology and behavioral finance help satisfy individual needs as manifested by Maslow's hierarchy. Hoffman (2007) supports this approach by stating that people have many alternative reasons for selecting stocks to meet their needs with substantial differences by sex, age, knowledge, and experience. Aspara and Tikkanen (2012) add a specific behavioral component to expected risk and return indicating that people have further motivation to invest in a specific company based on their affinity for that company.

One segment of personal finance is investments. De Brouwer's emphasis on providing advice indicating how to construct individualized behavioral influenced investment portfolios is a basic precursor to a more broad-based discussion of personal finance and motivation.

PERSONAL FINANCE INTEGRATION

The discussion on investment management from a Maslowian behavioral standpoint makes this chapter's thought process more practical. It can be differentiated from the previous humanistic section, which is more idealistic. The idealistic humanist appraisal has a problem. It not only expands the framework for motivation and satisfaction from the pure economic approach but also may conflict with it. People may have higher needs than money, such as self respect, truth, justice, self-actualization, and self-transcendence. On the other hand, Belk (1999) notes that money has material impact and influence on how individuals view themselves, including feelings of self-esteem, control, security, and indebtedness. Howell, Kurai, and Tam (2012) indicate that money purchases financial security and satisfaction of financial needs.

Some formal integration of the two approaches is needed. Maslow, perhaps inadvertently, provides a framework for doing so. The deficiency motives in his hierarchy have as a key factor the need for material financial income to rise to be able to move beyond these motives. However, if one is in the self-actualization stage, money is much less of a factor. Still, money through continuing income and/or achieved wealth can support higher level personal growth.

Even in people who Maslow admired such as higher level public citizens, both forms of motivation—“selfish” material and higher level characteristics—would appear to coexist. For example, presidents of the country may enjoy the pomp, travel, gifts, and respect generated by the position in addition to the altruistic potential to help raise citizens' standard of living.

Finance requires that an important component of any analysis be material satisfaction. Under business systems such as in the United States, people highly value making economic progress. Unlike certain other countries, such as France, where work and leisure may be strictly divided, in the United States fundamental goals can bring self-expression, which is a pleasurable goal, into the workplace environment. Many view the United States as having more materialistic goals than other developed societies. The stress on materialism and workplace achievement can easily be reflected in the average number of hours devoted to work in the United States, which exceeds most of economically advanced European countries.

Life Planning and Satisfaction

Until this point, the chapter has avoided discussing the role of personal finance in higher level goals. Now, the chapter introduces life planning, which is a system that combines the traditional financial planner's role of providing financial insight to clients with their desire to receive help to move beyond materialism.

Life planning by financial advisors is somewhat controversial. Many planners believe that their advice to clients should be limited to financial aspects of their well-being because they are unqualified to extend their role to areas established by psychologists, coaches, career counselors, and others. Furthermore, some financial planners may not have the patience or interest in listening to the nuances of a discussion that will include the specialized motivations of each individual.

Advocates of life planning note that while they do not rule out training in this area, what is needed is common sense. Many do not provide tangible recommendations, but merely a platform for individuals to uncover their own preferences. Financial advisors may be qualified because they are among their clients' closest advisors and many life decisions involve financial considerations. Clients may bring up the subject and planners offer assistance despite not viewing themselves as life planners.

According to Anthes and Lee (2001), life planning is the practical embodiment of uncovering what motivates people and how they can derive satisfaction from their efforts. By combining both financial and nonfinancial factors, life planning places human behavior alongside strict money factors in financial planning. Financial planners in this context extend beyond growing assets to helping people live happier, more productive lives.

Financial planning incorporates financial objectives such as the amount of money needed to meet a family's cost of living. Unlike the hierarchy of needs that focuses on the individual, financial planning emphasizes costs and focuses on the needs of the individual's family. The cost figures should be adjusted for risk so that a probabilistic framework can be created to conduct “what if” scenarios. For example, projected cost figures for the family could be set out for three inflationary scenarios: the current modest 2 percent framework, a rise to the 3 percent level, and one at 5 percent. The financial planner could give a probability to each scenario such as 40 percent, 40 percent, and 20 percent, respectively.

According to Anthes and Lee (2001), the prerequisite for decision-making and changeover to life planning should be:

• Motivation—an intense desire for the change
• All the required information necessary for the decision
• The ability to focus on the changes necessary (today)
• Preparations for problems and upside that can come
• An ability to make changes as circumstances change
• A keen understanding of your own policy
• Preparation of some people for unselfish behavior

Life planning can be broader in scope than self-actualization. Some people do not have the intensity of feeling and desire to do things that are both noble and altruistic. For them satisfaction comes from a simple and enjoyable retirement. Instead of realizing one's destiny, they talk in terms of a busy leisure time. Consequently, basic leisure time activities will be explored in more detail.

According to Moore (1998), two standards are needed to experience leisure: freedom to choose the activity and intrinsic motivation. Intrinsic motivation means interest that comes from within and not from how others view a person. Caring about how others see someone can make a person more materialistic and status-oriented. From this perspective, people who continue to work because they like what they do and not because they need to do it can be viewed as partaking in a leisure time pursuit.

Csikszentmihalyi's (1999) flow approach indicates that an individual's strongly positive leisure time involves active total absorption and intense concentration. Thus, an individual can lose perspective of time and the notion of being in control of his or her time. In contrast, passive activities, such as watching television, are like leisure's empty calories. Such activities provide relaxation but not great enjoyment because they involve no goals, challenges, and skills. Hence, the more someone watches television at one time, the worse his mood becomes. Planners can encourage their clients to develop interests in more hands-on leisure pursuits.

The other extreme could be what some would consider a more intricate, idealistic life-planning framework. Financial advisors could use such a framework to help their clients reach their full potential. The advisor's goal could be to help reveal or highlight those items that their clients are not aware of. One approach would be for life planners to teach people to:

• Be genuine—understand yourself
• Reach beyond your own culture
• Discover your calling in life
• Recognize that life is precious
• Accept people as they are
• Make sure basic needs have been reached
• Appreciate beauty
• Be in control as much as possible
• Focus on really important problems in life
• Select good choices among those presented

In sum, life planning helps people find what genuinely motivates them and helps them identify their goals and the necessary steps to reach them. The life planner may help guide that process by providing a structure and ongoing review. Finance is at the core of the planner's activity because clients may be unable to reach their goals without sufficient resources. However, the exact proportion of money and nonfinancial objectives is dependent on the wants and needs of clients.

SUMMARY

This chapter has examined motivation and satisfaction. It started by discussing classical economic theory with its emphasis on preferences revealed through purchases in the marketplace. In this context, consumer satisfaction comes through fulfilled spending decisions. The classical lifecycle theory of consumption and saving indicates that people are motivated to save for such reasons as accumulating financial resources for retirement. This lifecycle approach is one of the key components of personal financial planning in its quest for lifetime satisfaction.

In recognizing that consumers are motivated by many items such as the desire for relationships and mental challenges, the concreteness and objectivity of the classical model may be exchanged for the more judgmental behavioral model. This model can be more practical because it attempts to mirror how people act as opposed to how they should act. Put simply, the work on the behavioral life cycle theory and on control reflects this line of thinking.

Behavioral economics and behavioral finance have moved in a different direction. Instead of emphasizing man as machine, they focus on the particular wants and shortcomings of people. For example, people have conflicting goals and do not always react the same way in similar circumstances. In fact, they are motivated by more than money. Understanding what motivates them requires going beyond a single factor model as represented by the classical model.

Maslow's hierarchy of needs presents a fundamental approach to human motivation with a kind of ladder propelling people to higher needs as they achieve success with lower ones. Once someone meets the lower deficiency goals, they can move on to the higher level self-actualization. While the rigid hierarchical levels and what some may regard as the idealistic self-actualization level have been contentious, it has had a strong impact in a number of fields including finance.

Maslow was a humanist. Humanists further moved the field of economics away from the classical model. They indicated that people have motivations that are broader than the goal of maximization of their own interests. Many behavioral economists still seek a link to classical theory, whereas humanists have altruistic objectives and may even be thought to have a duty to be concerned about others and to act in an ethical manner. They may focus more attention on those people who are educated and have achieved esteem in their lives. Money has less to do with humanistic goals and may even serve as an obstruction to achievement of those higher level aspirations. Their goals may be appealing to some but may not resonate with others who have not reached the top rung and can be satisfied by retiring with more simple leisure time and less far-reaching personal goals.

Where does that place personal finance? People need money to climb Maslow's hierarchy and, for many, to help achieve life satisfaction. However mistaken or immature humanists may call having money as a goal, it can motivate many people. Such people achieve satisfaction from buying goods and services. Such individuals also derive satisfaction from other activities, however, and have other values with the preferential breakdown dependent on the values of each individual. Perhaps the multiple selves conflict between the planner and the doer should be extended to concern about one's self versus the desire to help others.

Personal finance should form a middle ground between too-rigid classical economics and too-idealistic humanism. It should retain its focus on money but encompass the flexibility and practicality of behavioral elements. Within this context, some personal financial planners may seek to help clients with their life planning goals. Most planners will feel comfortable giving advice in the financial realm concerning money issues and many will use at least basic behavioral techniques to help motivate and advance their clients' interest in life satisfaction.

DISCUSSION QUESTIONS

1. What are the strengths and weaknesses of the classical economic approach?

2. Explain the advantages and disadvantages of Maslow's hierarchy of needs approach.

3. Discuss Thaler and Shefrin's major contributions to behavioral finance.

4. Discuss whether self-actualization should be everyone's goal.

5. Discuss whether life planning is a legitimate area for financial planners to offer clients.

6. Identify and discuss the contributions of motivation and satisfaction within behavioral and personal finance.

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ABOUT THE AUTHOR

Lewis J. Altfest is Associate Professor of Finance at the Lubin School of Business at Pace University. He is also President of Altfest Personal Wealth Management, a fee-only financial planning and investment firm located in New York City with about two dozen employees. His research interests include personal financial planning, investments, and behavioral finance. He has published in both academic and professional journals such as the American Economist, Journal of Financial Planning, and Journal of Accountancy. He has also published a textbook, Personal Financial Planning. His Total Portfolio Management (TPM™) system of integrating personal financial planning and investment management is currently being practiced and further developed at his firm. He has a BBA from City College New York (Baruch College), an MBA from New York University, and a PhD from City University of New York, and holds the CFP, CFA, CPA, and PFS designations.