In Section 4.6 of Reading 9 (Behavioral Finance and Investment Processes)，it says investors tend to make the mistake of building portfolio in layers, where each layer is associated with a goal. While in Section 3.5 of Reading 13 (Concentrated Single Asset Positions), it suggests that in order to convince clients to reduce over-concentrated positions, advisor should use goal-based planning (put investments into 3 “buckets”, which is essentially layers in behavioral portfolio theory). So here’s my question, why should we use a framework (goal-based planning) that is problematic and is exactly what we are trying to avoid?
My sense is that since you cannot completely rationalise, you just take the same approach but improvise it. This is the solution that behavioral fin can offer.
The difference is in intention. In BPT, investors do it unknowingly, based on mental accounting and misinterpreting the risks involved.
In goal-based planning, it is done intentionally. This may not be the ideal solution, but certainly better than having a concentrated position.
Thanks for the insight. Now it does make sense.