Huang et al in this paper explore the application of the theory of plural rationality to defined benefit pension fund decision-making.

The current and prolonged uncertainty in financial markets has demonstrated that modern portfolio theory is no longer a reliable investment tool. They therefore consider how the plural rationality framework can help trustees make asset allocation decisions in an uncertain environment, bearing in mind that they have a duty to balance the interests of different groups of beneficiaries.

James P. Hawley, Andreas G. F. Hoepner, Keith L. Johnson, Joakim Sandberg, Edward J. Waitzer (Available from March 2014) Cambridge Handbook of Institutional Investment and Fiduciary Duty

Private sector defined benefit pension funds in the US operate under a framework determined by the Employment Retirement income Security Act (ERISA), 1974. The trustees, as fiduciaries who administer the pension plans and make investment decisions, must act solely in the interests of pension fund beneficiaries and balance the interests of other stakeholders in the pension system. These include the corporate sponsor of the plan, the participants (which includes current and future beneficiaries) and the government (interested in the long term stability and sustainability of the pension system and in keeping risks under control).

Plural rationality

The theory of plural rationality was developed by anthropologists and was not initially intended to be applied to financial markets. In contrast to modern portfolio theory, which assumes people will act in the same rational way given the same information, plural rationality suggests that there are four potential views of the state of the world, and the individuals that hold each of these views demonstrate particular characteristics and social relationships. All groups of people can be categorised into these world views, and thinking about beneficiaries in these terms can help fiduciaries better understand and achieve a balance between their specific expectations.

Nature benign

  • The nature benign world view holds that individuals do well when others also do well. In terms of conventional market theory this would equate to a boom market. Its supporters are likely to act in an individualistic and optimistic way chasing ever-increasing prosperity, and from an investment perspective are likely to be the people calling for deregulation, the freedom to innovate and to take appropriate investment risks, and supporting initiatives such as the internalisation of environmental costs. From a pension fund perspective, stakeholders with a nature benign world view might include employers investing to maximise profits for shareholders or future beneficiaries and believing in growth of retirement benefits.

Nature ephemeral

  • The nature ephemeral world view is the opposite of nature benign (a recessionary environment in conventional theory). Believers in this world view are egalitarian conservators; they strive to protect their capital, and would be the ones supporting re-distribution of wealth and calls for changes in human behaviour to minimise our impact on the environment. From a pension fund perspective this category would include current beneficiaries looking to protect their income against all risks.

Nature perverse

  • A nature perverse (or nature tolerant) world view is a moderate perspective. Individuals holding this world view are hierarchical managers, and see potential for prosperity only if risks can be controlled. They are more likely to support global stewardship, insisting on global solutions for global problems such as climate change. Governments that permit employers to offer retirement plans that meet their business needs but within pre-defined limits would fall into this category.

Nature capricious

  • The nature capricious world view is characterised by uncertainty. No traditional economic theory addresses this state. Holders of this view are pragmatists, focusing on short-term strategies to manage an uncertain future, and fatalistic, likely to avoid concentrated investments and maintain a large cash position. Employees with no interest in retirement planning, or fiduciaries who believe that the future is highly uncertain would fall into this category.

The world can be predominantly within any of these states at different times and people will have different views about how their future will look. The paper suggests that pension fund fiduciaries need to accommodate all of these world views, both in terms of how they balance the interests of their beneficiaries and in terms of how they think about their investment strategy.

Plural rationality is essentially a theory of systems, and the authors believe that it can help fiduciaries understand systemic risks in the financial market that were overlooked in the events preceding the credit crunch.


By examining the potential outcome of their investment strategy from the perspective of each of the four world views, fiduciaries can understand the potential benefits and limitations of their investment decisions from a more holistic viewpoint than a single world view, making it less likely that they will be surprised by future developments. For example, the plural rationalities framework requires consideration of extreme scenarios that are typically neglected, such as the total collapse of the financial system. In contrast, modern portfolio theory leads investors to consider only individualistic or moderate world views, an approach that led many investors to be taken by surprise by the tail risk events of the financial crisis. If fiduciaries had taken into account fatalistic perspectives, they may have been less surprised and better prepared to manage their portfolios through a period of extreme market stress.

The authors conclude that the longer the current period of uncertainty continues, the more likely that investors will drift towards a fatalistic world view. However, fiduciaries need to recognise that other pension plan stakeholders may have different perspectives. Disagreements over strategy are never going to go away, but the plural rationality framework offers a way of seeking an acceptable compromise and avoiding the worst of potential surprises.

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