Behavioral finance FAQ / Glossary (Needs)

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i: incidental

(human) Needs

See motivation, preference,
utility, ophelimity

Who can live happily with only one Ferrari?

How to match needs, which have no limits,
and resources, which are finite?

It is the "need" to answer such questions that brought
some philosophers and scientists to
invent economics.

Definition

In their most extensive meaning, human
needs or wants are
what people perceive
as unrealized satisfactions
.

The borders between needs, lacks, wants, wishes are rather 
fuzzy
.

Same fuzziness in their relations between needs and with the emotional
couple desires & aversions, .

We enter here the human soul black box!

Anyway, those notions are close also to the ideas of appetites,
hungers,
tastes / distates, motivations or drives and of course
preferences
(see that word). 

Needs follow a gradation in their complexity

Organized or instinctive? Basic or lofty?

Have a look in the catalog !

1) Gradation of needs by degree of strength

Needs can stay vague, general or superficial according to
    situations.

or they can be be mentally organized into intentions

and even be materialized into agendas (practical goals) 
    (see those words).

2) Gradation of needs by urge and sophistication

Needs can have either physical or psychological origins.
Therefore, there can be a scale of preferences (see
preference) corresponding to the nature of what is felt missing.

It goes:

from immediate and direct vital needs,

to the search of comfort, pleasure ...or trophy,

in parallel to a fear of displeasure

and to higher ambitions / lacks (see below the "pyramid"
    section).

3) The money filter.

Economic needs are those which can be satisfied by the

economic system and are obviously conditioned by economic
resources.

Common or diverse needs? Legitimate or not?

Beware of intolerance about other people's needs.

1) The most basic needs, which are mostly linked to survival

(food...) are common to most people.

On the economic side (consumption, protection...), the basic

needs are less "volatile", more stable, widespread and permanent
than theother economic needs.

2) But other needs / wants / motivations / drives , closer to desires (and
      aversions) are linked to individual preferences (see that word).


They can differ widely from one individual to another, as linked to:

What the person feels as pleasure or pain (and in
    what
degree it is felt). This important determinant
    of
needs is not exactly the same for everybody.  


Also, how reason regulates those feelings (in order

to bring positive results or limit negative effects)
can be quite different between individuals.

To consider our needs as everybody's needs is a mental bias
(projection).

This kind of attitude often brings havoc in politics (deciding what
other people need) and failure in business and investment.

3) To complete the definition, philosophers (and ideologues) might
      consider:

Some needs as good and legitimate  (they would qualify
   only those as needs)

Others as futile, egotist (showing off...),  mimetic
   tastes or fancies,
Or even as bad and harmful. 

That distinction might be true in some respect (this is developed at the
end of this article)
if only because ...it can be useful to categorize things
to understand them.

Also ethics (see the related article) have to be taken into account
in social life.

They are among the bases that justify the existence of society and
communities.

Sadly, there are also less positive bases, such as the aversion to other
communities.

But the distinction moral / immoral is also subjective 
and can lead to preset dogmatic attitudes about "good"
and "bad" needs.

Radical moralists have not much to do with ethics, as it becomes tyranny
if enforced blindly.

The enforcers might have hidden ...needs, such as domination...

4) Last but not least, psychologists make a distinction between
      motivations
(drives):

Those that are rational (in the sense of effective to reach a goal,
    itself supposed rational),

And those that are biased, a topic largely developed in
   this site (see bias).

Is there a pyramid, a hierarchy of needs?

Pharaoh-like desires?

According to many psychologists there is a hierarchy of human needs.

When choice is involved, we can talk about preferences (see that word).

Abraham Maslow, a pioneer in those studies, stated that
people get interested in feeding "higher" needs only after
the "lower" / basic ones have been sated.
He called his theory the "pyramid of needs".

The Maslow pyramid steps start at ground level with
basic needs (food...) and ends at its summit with more emotion-

fulfilling and mind-enhancing needs.

The various stages are (the pyramid is reverted,

starting from the bottom archeologist entrance to the pyramid ;-):

1) Basic physiological needs,

2) Safety (immediate safety to start with, but also anticipation
    of future risks),

3) Social belonging-related needs (love, social attraction...),

4) Esteem-related needs(trophies...,

5) Self-actualization: this covers a bunch of various needs
    considered as the most "humane" ones, rarely found in other

species, poor things ;-)).

This thesis should not be considered as moral theory, there is no
moral judgment
to be found in each level about the human qualities
or the legitimacy of purpose

Limitations to that "hierarchy model"

Some mix up in the pyramid stones?


There is some truth in that hierarchy theory, but also many exceptions.

The pyramid is a rough representation of what makes people tick and in
what order,but things are far from being so simple.

Preferences (see that word) are not so clear-cut:

People might "sacrifice" some basic needs for "higher" ones,

A related idea is that preferences (see the related article) are
  
not always transitive.

They might go through detours or
reversions

* Preferring A over B, and B over C,
   does not mean always preferring A over C.

* Also preferences can change from one day to the 
  
other, or according to situations (see preference).

At least deciders might muddle through various levels of
   that theoretical hierarchy, make trade-offs and try to find a

   balance  between them.


In economic decisions, the price is another variable
   to weigh satisfactions.
   Every economic choice is supposed to be done by comparing

* the "utility" (see that word), a personal estimate of 

the monetary value of that satisfaction,

* and the availability and price of the means to satisfy it.

Other approaches

Time is money, but getting money takes time

Other models than the above "pyramid" exist, either more sophisticated or
that introduce other elements.

But they also have their limitations.

An example largely studied in finance is the arbitrage
between
short term and long
term
preferences
(see time horizon).

People are usually biased towards immediate satisfaction.

But also they usually anticipate consciously, in some degree, their
   future
(here again at the difference of most other species, even if

squirrels store nuts for the Winter, but just as a mechanical instinct).

This explains why they might accept some immediate deprivation and
choose education, dieting, savings, investing, etc. over instant
satisfactions.

The case in economics, finance and marketing

Needs are what make economic players ...play.

Whatever its limitations, the hierarchy of needs theory is helpful in marketing,
economics and finance reasoning.

Economics is a crucial area of research and knowledge because needs
tend to be limitless
while resources to satisfy them are
finite
(even if they evolve in time via investments, innovations...).

In this respect, it has to be noted, as already stated above, that:

Not all needs can be labeled economic needs. Some "deep-seated"
    needs  do not belong to the economic realm, as they cannot be fulfilled

by the production - allocation - distribution system it entails.

An important element to make choices between economic satisfactions

is the price (and inevitably the buyers' solvency).

Here are some economic findings related to human needs:

. What are called "human economic needs" include many
     kinds of preferences, desires,
appetites... (see ophelimity)

that can be fulfilled by offers (products, services) from
economic entities.

Again, this should not be taken as an ethical concept, that
would define morally correct wishes or offers and superfluous
or damaging ones.

Economists have to describe phenomenon, more than to
intrude into the definition of social norms, although they
might provide evaluations of the consequences of
economic behaviors.


Markets are the main places where economic 
    needs meet and compete for satisfaction.


Also, societies and groups influence, for
   good
or bad, personal needs.

The needs that are considered "socially acceptable" or - one
step higher - contributing to the "common good" (social
needs) are ethical and political concepts.

They vary in time and places. They can have an important
influence on economic policies and practices.


It has to be noted, without taking side on moral grounds, that
   economic needs are sometimes biased and self-defeating,

This happens when they are too much in conflict with what
reality can offer, or when they foster damaging behaviors.
See behavioral bias, perverse effect...

Two main money-related needs

Safe gains?

When needs are related to money, which is directly the case in
finance
,
those that play a crucial role in decision-making are:

1) Getting monetary
safety


vs.

2) Getting optimal
returns

Those needs at the same time complement and oppose each other in
    a kind of yin yang dance.

Such a monetary risks / rewards expected
    balance
  makes the basis of the rational expectation / expected
    utility
theory on which standard models are built.

Those risk /rewards criteria (see risk) are the source of risk management

techniques such as financial markets derivatives dealings.

But it would be reductive to focus on those two finance-related needs
only
(apparently not much above the two bottom steps of the Maslow
pyramid).

Other needs often interfere:

Some that are considered as biases as they distort the decision,

Some, either hedonistic or socially conscious, as legitimate additional
    "extra-financial" preferences.

What about ethics,
     morality, common good, etc?

Moral needs, a crucial albeit slippery area.

As said above, economic needs have no normative moral meaning.

Economics does not differentiate needs from desires.

Needs are taken as any human preference (see ophelimity) that affect
demandfor good, services, assets, work, capital, knowledge, bread
and games...

But the moral and social aspects, as said above also,
have their incidence in economic and financial behaviors.

They deserve, without taking sides, to be developed here
(see also the "ethics" article).

Individual application

There can be divergence between persons on what considered

as   moral or immoral needs. It can be based
on

* either set ideas about vice and virtue,

* or a cool analysis of what is useful and damaging for the 
   decider and other people (externalities).


Social influence

What is deemed moral or immoral by society (or by peers, or
by a group), and that influences individual ideas

about ethics (see that word) differs between places, perods
or civilizations.


Collective application

Apart those ethical principles used in individual decisions, there
are social influences.

Groups, social organizations and the whole society try to define,
wisely or not, what are social needs and how their institutions
apply them.

They are often grouped under the appellation "common good",
and institutionalized through organizations, regulations,
supervisions.

Those common preferences can be in
harmony or in
conflict with individual
needs, preferences or utility
(see "ethics" for example).

Again, without taking sides, society is obviously not always
friendly to individuals, and individuals not always friendly to
society. And several societies can be unfriendly between them.

On the other hand, a civilized society cannot work without
basic principles and guidelines, even some strict rules, to
avoid that citizens harm one another, or to some degree
themselves.

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

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This page last update: 20/09/15  

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