Why we need distinct risk buckets: balancing our natural loss aversion with the allure of opportunities that offer the potential for massive upside.
Topics covered include:
- What is modern portfolio theory, and what are some of its flaws
- Why so many people have gotten wealthy by being undiversified
- How to balance personal risk, market risk, and aspirational risk
- How prospect theory explains our attraction to positively skewed opportunities
- Why most people won't get wealthy unless they take some aspirational risk
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Show Notes
Portfolio Selection by Harry Markowitz—The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91)
Safety First and the Holding of Assets by A. D. Roy—Econometrica, Vol. 20, No. 3 (Jul., 1952), pp. 431-449)
The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot and Richard L. Hudson—Hachette Book Group)
Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors by Ashvin B. Chhabra—The Journal of Wealth Managment, Vol. 7, No. 4, pp 8-34, Spring 2005)
The Wealth of Households: 2021: Current Population Reports by Briana Sullivan, Donald Hays, and Neil Bennett—Census.gov)
Average, Median, Top 1%, and all United States Net Worth Percentiles—DQYDJ)
PROSPECT THEORY AND STOCK MARKET ANOMALIES by Nicholas C. Barberis, Lawrence J. Jin, and Baolian Wang—NBER WORKING PAPER SERIES)
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