Inhoudsopgave
CHAPTER 1 Digital household finance: positioning......................................................................................................................5
1.1. From corporate finance to household finance............................................................................................................................................... 5
1.2. Recent European initiatives to improve financial wellbeing at societal level..................................................................................6
1.2.1. Belgian example: Pensiontest............................................................................................................................................................. 6
1.2.2. Financial literacy..................................................................................................................................................................................... 6
1.2.3. Financial resilience................................................................................................................................................................................. 7
1.2.4. Europe’s Retail Investment Strategy (RIS).................................................................................................................................... 7
1.2.5. Europe’s Savings and Investments Union..................................................................................................................................... 7
1.2.6. Regulatory and supervisory initiatives.......................................................................................................................................... 8
1.3. Motivation to focus on (digital) investing....................................................................................................................................................... 9
1.3.1. Three perspectives on easy access................................................................................................................................................... 9
1.3.2. Human-robot interactions in investment decisions.................................................................................................................. 9
1.3.3. Invest your spare change................................................................................................................................................................... 10
1.3.4. Smart(phone) investing..................................................................................................................................................................... 10
1.4. The rise of the retail investor.............................................................................................................................................................................. 11
1.4.1. Why investing has become more accessible.............................................................................................................................. 11
1.4.2. FSMA Retail Investor Dashboard................................................................................................................................................... 11
1.4.3. Efficient Market Hypothesis (Eugene Fama)............................................................................................................................. 11
1.4.4. Arguments for market inefficiency................................................................................................................................................ 12
1.4.5. Inelastic Market Hypothesis (IMH)............................................................................................................................................... 12
1.5. The emotional component of investing.......................................................................................................................................................... 13
1.5.1. Digital conversion................................................................................................................................................................................. 13
1.5.2. Why robo-advisers need “artificial emotion”............................................................................................................................ 13
1.5.3. From standard finance to applied behavioral finance........................................................................................................... 13
1.6. The behavioral design of financial services.................................................................................................................................................. 14
1.6.1. General principle.................................................................................................................................................................................. 14
1.6.2. Save More Tomorrow (SMarT)....................................................................................................................................................... 14
1.6.3. Behavioral design for digital financial services........................................................................................................................ 14
1.7. Behavioral finance and the enhancement of traditional finance....................................................................................................... 16
1.7.1. Standard finance versus behavioral finance.............................................................................................................................. 16
1.7.2. Behavioral Finance 2.0: connecting people, products and portfolios..............................................................................16
1.7.3. Course approach................................................................................................................................................................................... 17
1.7.4. Key take-aways...................................................................................................................................................................................... 17
CHAPTER 2 Digital household finance: people............................................................................................................................18
2.1. Decision-making under risk: the basic framework................................................................................................................................... 18
2.2. Expected value theory............................................................................................................................................................................................ 18
2.2.1. Expected value....................................................................................................................................................................................... 18
2.2.2. The Sint-Petersburg paradox........................................................................................................................................................... 18
2.3. Expected utility theory........................................................................................................................................................................................... 18
2.3.1. From monetary value to utility....................................................................................................................................................... 19
2.3.2. Certainty equivalent and risk premium....................................................................................................................................... 19
2.3.3. Rules of rationality............................................................................................................................................................................... 19
2.3.4. Challenges to expected utility.......................................................................................................................................................... 20
2.4. Prospect theory......................................................................................................................................................................................................... 21
2.4.1. Reference point..................................................................................................................................................................................... 21
2.4.2. Risk attitude in gains and losses..................................................................................................................................................... 21
2.4.3. Loss aversion.......................................................................................................................................................................................... 21
2.4.4. Probability weighting......................................................................................................................................................................... 21
2.5. Use case: investor risk profiling......................................................................................................................................................................... 22
2.5.1. Standard suitability assessment..................................................................................................................................................... 22
2.5.2. Why static questionnaires are insufficient................................................................................................................................. 22
1
, 2.5.3. Improving content and method...................................................................................................................................................... 22
2.5.4. Financial personality: what is measured?.................................................................................................................................. 22
2.5.5. Dynamic sequence of choices.......................................................................................................................................................... 23
2.5.6. Interpretation of the output............................................................................................................................................................. 24
2.5.7. Findings and uses................................................................................................................................................................................. 24
2.6. Behavioral finance extensions............................................................................................................................................................................ 25
2.6.1. Thinking fast and slow....................................................................................................................................................................... 25
2.6.2. Humans, econs and nudges............................................................................................................................................................... 25
2.6.3. Three types of benefits....................................................................................................................................................................... 25
2.8. Detailed theory, calculations and syllabus additions............................................................................................................................... 26
2.8.1. Risk versus uncertainty...................................................................................................................................................................... 26
2.8.2. Expected value: complete worked example............................................................................................................................... 26
2.8.3. Expected utility, diminishing marginal utility and concavity.............................................................................................. 27
2.8.4. Certainty equivalent and risk premium: numerical example............................................................................................. 27
2.8.5. Rationality rules and the Allais paradox..................................................................................................................................... 28
2.8.6. Utility of change and the vaccine framing experiment.......................................................................................................... 28
2.8.7. Prospect theory: complete structure............................................................................................................................................ 29
2.8.8. Probability weighting in more depth............................................................................................................................................ 30
2.8.9. Loss aversion versus risk aversion................................................................................................................................................ 30
2.8.10. Investor profiling: the three quantitative rounds................................................................................................................. 30
2.8.11. Interpreting x+, L and x−................................................................................................................................................................. 31
2.8.12. From risk profile to financial personality................................................................................................................................ 33
2.8.13. Model answer structure for an open question....................................................................................................................... 33
CHAPTER 3 Digital household finance: products........................................................................................................................33
3.1. Return distributions: two complementary views....................................................................................................................................... 33
3.1.1. Why logarithmic returns?................................................................................................................................................................. 34
3.2. Mean and variance: the classic product view.............................................................................................................................................. 35
3.2.1. Random walks........................................................................................................................................................................................ 35
3.2.2. Normal and lognormal modelling.................................................................................................................................................. 35
3.2.3. Efficient markets and predictability............................................................................................................................................. 35
3.2.4. Can machine learning predict returns?........................................................................................................................................ 35
3.2.5. Mean-variance product ratings....................................................................................................................................................... 36
3.3. Beyond mean and variance................................................................................................................................................................................. 36
3.3.1. Why mean and variance are incomplete..................................................................................................................................... 36
3.3.2. Skewness.................................................................................................................................................................................................. 36
3.3.3. Upside potential and downside risk.............................................................................................................................................. 37
3.3.4. Generalized performance measures............................................................................................................................................. 38
3.4. Product positioning with investor loss aversion......................................................................................................................................... 38
3.4.1. Product appreciation.......................................................................................................................................................................... 38
3.4.2. A complete product offer................................................................................................................................................................... 38
3.4.3. Performance reporting....................................................................................................................................................................... 39
3.5. Use case: structured products............................................................................................................................................................................. 39
3.5.1. Position in the retail investment landscape............................................................................................................................... 39
3.5.2. Building block: the term deposit.................................................................................................................................................... 39
3.5.3. Structured fund versus structured bond..................................................................................................................................... 39
3.5.4. Fundamental law of structured products................................................................................................................................... 40
3.5.5. Fees and taxes........................................................................................................................................................................................ 40
3.5.6. Option basics.......................................................................................................................................................................................... 41
3.5.7. Reverse engineering example 1: capital preservation plus participation......................................................................41
3.5.8. Reverse engineering example 2: leveraged upside with downside and a cap..............................................................41
3.6. Chapter 3 — exam-oriented take-aways....................................................................................................................................................... 42
3.7. Detailed theory, calculations and syllabus additions............................................................................................................................... 43
3.7.1. Simulated return paths and the two views................................................................................................................................ 43
3.7.2. Logarithmic returns: why they are used..................................................................................................................................... 43
3.7.3. Fair-coin random walk: mean, variance and memory........................................................................................................... 44
3.7.4. Adding drift to the random walk.................................................................................................................................................... 44
2
, 3.7.5. Normal log returns and lognormal prices................................................................................................................................... 44
3.7.6. Efficient markets, technical analysis and fundamental analysis........................................................................................ 45
3.7.7. Why machine learning is difficult in finance.............................................................................................................................. 45
3.7.8. Cross-sectional product ratings...................................................................................................................................................... 46
3.7.9. Same mean and variance, different distributions.................................................................................................................... 46
3.7.10. Skewness and risk perception...................................................................................................................................................... 47
3.7.11. Upside potential and downside risk: formulas...................................................................................................................... 48
3.7.12. Twelve-month worked example.................................................................................................................................................. 48
3.7.13. Generalized performance reporting........................................................................................................................................... 49
3.7.14. Loss aversion and product classification.................................................................................................................................. 49
3.7.15. Hold-to-Grow, Adapt-to-Trend and Adapt-to-Protect......................................................................................................... 49
3.7.16. Why risk-adjusted performance reporting matters............................................................................................................. 50
3.7.17. Retail investment landscape and client needs........................................................................................................................ 50
3.7.18. Term deposit and the budget for options................................................................................................................................. 51
3.7.19. Structured fund versus structured bond.................................................................................................................................. 52
3.7.20. Fundamental law and fees.............................................................................................................................................................. 52
3.7.21. Option basics....................................................................................................................................................................................... 53
3.7.22. Structured-product example 1: protected participation.................................................................................................... 53
3.7.23. Structured-product example 2: leveraged upside, downside and cap..........................................................................54
3.7.24. Structured-product exam method............................................................................................................................................... 55
3.7.25. Model answer structure for a product-comparison question.......................................................................................... 55
CHAPTER 4 Digital household finance: portfolios......................................................................................................................56
4.1. Portfolio construction: efficiency and adaptivity....................................................................................................................................... 56
4.2. Classic portfolio theory.......................................................................................................................................................................................... 56
4.2.1. The power of diversification............................................................................................................................................................ 56
4.2.2. Annualization......................................................................................................................................................................................... 56
4.2.3. Correlation.............................................................................................................................................................................................. 57
4.2.4. Two-asset portfolio formula............................................................................................................................................................ 57
4.2.5. Efficient frontier.................................................................................................................................................................................... 58
4.2.6. Selecting the optimal efficient portfolio...................................................................................................................................... 58
4.3. Goals-based wealth management..................................................................................................................................................................... 58
4.3.1. Reframing risk as goal shortfall...................................................................................................................................................... 58
4.3.2. Goal Probability and Loss Threshold curves............................................................................................................................. 59
4.4. Adaptive portfolios — method 1....................................................................................................................................................................... 60
4.4.1. Switching between efficient allocations...................................................................................................................................... 60
4.5. Adaptive portfolios — method 2....................................................................................................................................................................... 61
4.5.1. Static weights in adaptive asset-class strategies...................................................................................................................... 61
4.5.2. Selecting the strategies....................................................................................................................................................................... 61
4.5.3. Probability matching........................................................................................................................................................................... 61
4.5.4. Three-step weighting heuristic....................................................................................................................................................... 62
4.5.5. Worked example................................................................................................................................................................................... 62
4.5.6. Comparison of the two adaptive methods.................................................................................................................................. 62
4.6. Behavioral portfolios for normal people....................................................................................................................................................... 63
4.7. Use case: comfort-zone investing...................................................................................................................................................................... 64
4.7.1. Plain-language metrics....................................................................................................................................................................... 64
4.8. Chapter 4 — exam-oriented take-aways....................................................................................................................................................... 65
4.9. Integrated People–Products–Portfolios framework................................................................................................................................. 65
4.10. Detailed theory, calculations and syllabus additions............................................................................................................................ 66
4.10.1. Portfolio return and annualization............................................................................................................................................. 66
4.10.2. Why diversification reduces risk................................................................................................................................................. 66
4.10.3. Slide 9: switching two observations........................................................................................................................................... 67
4.10.4. Correlation is dynamic..................................................................................................................................................................... 67
4.10.5. Two-asset opportunity set and efficient frontier.................................................................................................................. 68
4.10.6. Many assets and diversification breadth.................................................................................................................................. 68
4.10.7. Selecting one efficient portfolio with risk aversion.............................................................................................................. 68
4.10.8. Why a static efficient portfolio may not be behaviorally sufficient...............................................................................69
3
, 4.10.9. Goals-based investing: translating preferences..................................................................................................................... 69
4.10.10. Goal Probability and Loss Threshold curves........................................................................................................................ 69
4.10.11. Adaptive method 1: switching along the efficient frontier............................................................................................. 70
4.10.12. Adaptive method 2: static strategy weights......................................................................................................................... 71
4.10.13. Slow thinking selects the category; fast thinking selects the mix................................................................................71
4.10.14. Probability matching experiment............................................................................................................................................. 71
4.10.15. Three-step probability-matching portfolio algorithm...................................................................................................... 72
4.10.16. Worked probability-matching example................................................................................................................................. 72
4.10.17. Comparing the two adaptive approaches.............................................................................................................................. 73
4.10.18. Behavioral portfolio theory: finance for normal people.................................................................................................. 73
4.10.19. Comfort-zone investing................................................................................................................................................................ 73
4.10.20. Communication and reporting as part of portfolio construction.................................................................................74
4.10.21. Model answer structure for an integrated portfolio question....................................................................................... 74
4
CHAPTER 1 Digital household finance: positioning......................................................................................................................5
1.1. From corporate finance to household finance............................................................................................................................................... 5
1.2. Recent European initiatives to improve financial wellbeing at societal level..................................................................................6
1.2.1. Belgian example: Pensiontest............................................................................................................................................................. 6
1.2.2. Financial literacy..................................................................................................................................................................................... 6
1.2.3. Financial resilience................................................................................................................................................................................. 7
1.2.4. Europe’s Retail Investment Strategy (RIS).................................................................................................................................... 7
1.2.5. Europe’s Savings and Investments Union..................................................................................................................................... 7
1.2.6. Regulatory and supervisory initiatives.......................................................................................................................................... 8
1.3. Motivation to focus on (digital) investing....................................................................................................................................................... 9
1.3.1. Three perspectives on easy access................................................................................................................................................... 9
1.3.2. Human-robot interactions in investment decisions.................................................................................................................. 9
1.3.3. Invest your spare change................................................................................................................................................................... 10
1.3.4. Smart(phone) investing..................................................................................................................................................................... 10
1.4. The rise of the retail investor.............................................................................................................................................................................. 11
1.4.1. Why investing has become more accessible.............................................................................................................................. 11
1.4.2. FSMA Retail Investor Dashboard................................................................................................................................................... 11
1.4.3. Efficient Market Hypothesis (Eugene Fama)............................................................................................................................. 11
1.4.4. Arguments for market inefficiency................................................................................................................................................ 12
1.4.5. Inelastic Market Hypothesis (IMH)............................................................................................................................................... 12
1.5. The emotional component of investing.......................................................................................................................................................... 13
1.5.1. Digital conversion................................................................................................................................................................................. 13
1.5.2. Why robo-advisers need “artificial emotion”............................................................................................................................ 13
1.5.3. From standard finance to applied behavioral finance........................................................................................................... 13
1.6. The behavioral design of financial services.................................................................................................................................................. 14
1.6.1. General principle.................................................................................................................................................................................. 14
1.6.2. Save More Tomorrow (SMarT)....................................................................................................................................................... 14
1.6.3. Behavioral design for digital financial services........................................................................................................................ 14
1.7. Behavioral finance and the enhancement of traditional finance....................................................................................................... 16
1.7.1. Standard finance versus behavioral finance.............................................................................................................................. 16
1.7.2. Behavioral Finance 2.0: connecting people, products and portfolios..............................................................................16
1.7.3. Course approach................................................................................................................................................................................... 17
1.7.4. Key take-aways...................................................................................................................................................................................... 17
CHAPTER 2 Digital household finance: people............................................................................................................................18
2.1. Decision-making under risk: the basic framework................................................................................................................................... 18
2.2. Expected value theory............................................................................................................................................................................................ 18
2.2.1. Expected value....................................................................................................................................................................................... 18
2.2.2. The Sint-Petersburg paradox........................................................................................................................................................... 18
2.3. Expected utility theory........................................................................................................................................................................................... 18
2.3.1. From monetary value to utility....................................................................................................................................................... 19
2.3.2. Certainty equivalent and risk premium....................................................................................................................................... 19
2.3.3. Rules of rationality............................................................................................................................................................................... 19
2.3.4. Challenges to expected utility.......................................................................................................................................................... 20
2.4. Prospect theory......................................................................................................................................................................................................... 21
2.4.1. Reference point..................................................................................................................................................................................... 21
2.4.2. Risk attitude in gains and losses..................................................................................................................................................... 21
2.4.3. Loss aversion.......................................................................................................................................................................................... 21
2.4.4. Probability weighting......................................................................................................................................................................... 21
2.5. Use case: investor risk profiling......................................................................................................................................................................... 22
2.5.1. Standard suitability assessment..................................................................................................................................................... 22
2.5.2. Why static questionnaires are insufficient................................................................................................................................. 22
1
, 2.5.3. Improving content and method...................................................................................................................................................... 22
2.5.4. Financial personality: what is measured?.................................................................................................................................. 22
2.5.5. Dynamic sequence of choices.......................................................................................................................................................... 23
2.5.6. Interpretation of the output............................................................................................................................................................. 24
2.5.7. Findings and uses................................................................................................................................................................................. 24
2.6. Behavioral finance extensions............................................................................................................................................................................ 25
2.6.1. Thinking fast and slow....................................................................................................................................................................... 25
2.6.2. Humans, econs and nudges............................................................................................................................................................... 25
2.6.3. Three types of benefits....................................................................................................................................................................... 25
2.8. Detailed theory, calculations and syllabus additions............................................................................................................................... 26
2.8.1. Risk versus uncertainty...................................................................................................................................................................... 26
2.8.2. Expected value: complete worked example............................................................................................................................... 26
2.8.3. Expected utility, diminishing marginal utility and concavity.............................................................................................. 27
2.8.4. Certainty equivalent and risk premium: numerical example............................................................................................. 27
2.8.5. Rationality rules and the Allais paradox..................................................................................................................................... 28
2.8.6. Utility of change and the vaccine framing experiment.......................................................................................................... 28
2.8.7. Prospect theory: complete structure............................................................................................................................................ 29
2.8.8. Probability weighting in more depth............................................................................................................................................ 30
2.8.9. Loss aversion versus risk aversion................................................................................................................................................ 30
2.8.10. Investor profiling: the three quantitative rounds................................................................................................................. 30
2.8.11. Interpreting x+, L and x−................................................................................................................................................................. 31
2.8.12. From risk profile to financial personality................................................................................................................................ 33
2.8.13. Model answer structure for an open question....................................................................................................................... 33
CHAPTER 3 Digital household finance: products........................................................................................................................33
3.1. Return distributions: two complementary views....................................................................................................................................... 33
3.1.1. Why logarithmic returns?................................................................................................................................................................. 34
3.2. Mean and variance: the classic product view.............................................................................................................................................. 35
3.2.1. Random walks........................................................................................................................................................................................ 35
3.2.2. Normal and lognormal modelling.................................................................................................................................................. 35
3.2.3. Efficient markets and predictability............................................................................................................................................. 35
3.2.4. Can machine learning predict returns?........................................................................................................................................ 35
3.2.5. Mean-variance product ratings....................................................................................................................................................... 36
3.3. Beyond mean and variance................................................................................................................................................................................. 36
3.3.1. Why mean and variance are incomplete..................................................................................................................................... 36
3.3.2. Skewness.................................................................................................................................................................................................. 36
3.3.3. Upside potential and downside risk.............................................................................................................................................. 37
3.3.4. Generalized performance measures............................................................................................................................................. 38
3.4. Product positioning with investor loss aversion......................................................................................................................................... 38
3.4.1. Product appreciation.......................................................................................................................................................................... 38
3.4.2. A complete product offer................................................................................................................................................................... 38
3.4.3. Performance reporting....................................................................................................................................................................... 39
3.5. Use case: structured products............................................................................................................................................................................. 39
3.5.1. Position in the retail investment landscape............................................................................................................................... 39
3.5.2. Building block: the term deposit.................................................................................................................................................... 39
3.5.3. Structured fund versus structured bond..................................................................................................................................... 39
3.5.4. Fundamental law of structured products................................................................................................................................... 40
3.5.5. Fees and taxes........................................................................................................................................................................................ 40
3.5.6. Option basics.......................................................................................................................................................................................... 41
3.5.7. Reverse engineering example 1: capital preservation plus participation......................................................................41
3.5.8. Reverse engineering example 2: leveraged upside with downside and a cap..............................................................41
3.6. Chapter 3 — exam-oriented take-aways....................................................................................................................................................... 42
3.7. Detailed theory, calculations and syllabus additions............................................................................................................................... 43
3.7.1. Simulated return paths and the two views................................................................................................................................ 43
3.7.2. Logarithmic returns: why they are used..................................................................................................................................... 43
3.7.3. Fair-coin random walk: mean, variance and memory........................................................................................................... 44
3.7.4. Adding drift to the random walk.................................................................................................................................................... 44
2
, 3.7.5. Normal log returns and lognormal prices................................................................................................................................... 44
3.7.6. Efficient markets, technical analysis and fundamental analysis........................................................................................ 45
3.7.7. Why machine learning is difficult in finance.............................................................................................................................. 45
3.7.8. Cross-sectional product ratings...................................................................................................................................................... 46
3.7.9. Same mean and variance, different distributions.................................................................................................................... 46
3.7.10. Skewness and risk perception...................................................................................................................................................... 47
3.7.11. Upside potential and downside risk: formulas...................................................................................................................... 48
3.7.12. Twelve-month worked example.................................................................................................................................................. 48
3.7.13. Generalized performance reporting........................................................................................................................................... 49
3.7.14. Loss aversion and product classification.................................................................................................................................. 49
3.7.15. Hold-to-Grow, Adapt-to-Trend and Adapt-to-Protect......................................................................................................... 49
3.7.16. Why risk-adjusted performance reporting matters............................................................................................................. 50
3.7.17. Retail investment landscape and client needs........................................................................................................................ 50
3.7.18. Term deposit and the budget for options................................................................................................................................. 51
3.7.19. Structured fund versus structured bond.................................................................................................................................. 52
3.7.20. Fundamental law and fees.............................................................................................................................................................. 52
3.7.21. Option basics....................................................................................................................................................................................... 53
3.7.22. Structured-product example 1: protected participation.................................................................................................... 53
3.7.23. Structured-product example 2: leveraged upside, downside and cap..........................................................................54
3.7.24. Structured-product exam method............................................................................................................................................... 55
3.7.25. Model answer structure for a product-comparison question.......................................................................................... 55
CHAPTER 4 Digital household finance: portfolios......................................................................................................................56
4.1. Portfolio construction: efficiency and adaptivity....................................................................................................................................... 56
4.2. Classic portfolio theory.......................................................................................................................................................................................... 56
4.2.1. The power of diversification............................................................................................................................................................ 56
4.2.2. Annualization......................................................................................................................................................................................... 56
4.2.3. Correlation.............................................................................................................................................................................................. 57
4.2.4. Two-asset portfolio formula............................................................................................................................................................ 57
4.2.5. Efficient frontier.................................................................................................................................................................................... 58
4.2.6. Selecting the optimal efficient portfolio...................................................................................................................................... 58
4.3. Goals-based wealth management..................................................................................................................................................................... 58
4.3.1. Reframing risk as goal shortfall...................................................................................................................................................... 58
4.3.2. Goal Probability and Loss Threshold curves............................................................................................................................. 59
4.4. Adaptive portfolios — method 1....................................................................................................................................................................... 60
4.4.1. Switching between efficient allocations...................................................................................................................................... 60
4.5. Adaptive portfolios — method 2....................................................................................................................................................................... 61
4.5.1. Static weights in adaptive asset-class strategies...................................................................................................................... 61
4.5.2. Selecting the strategies....................................................................................................................................................................... 61
4.5.3. Probability matching........................................................................................................................................................................... 61
4.5.4. Three-step weighting heuristic....................................................................................................................................................... 62
4.5.5. Worked example................................................................................................................................................................................... 62
4.5.6. Comparison of the two adaptive methods.................................................................................................................................. 62
4.6. Behavioral portfolios for normal people....................................................................................................................................................... 63
4.7. Use case: comfort-zone investing...................................................................................................................................................................... 64
4.7.1. Plain-language metrics....................................................................................................................................................................... 64
4.8. Chapter 4 — exam-oriented take-aways....................................................................................................................................................... 65
4.9. Integrated People–Products–Portfolios framework................................................................................................................................. 65
4.10. Detailed theory, calculations and syllabus additions............................................................................................................................ 66
4.10.1. Portfolio return and annualization............................................................................................................................................. 66
4.10.2. Why diversification reduces risk................................................................................................................................................. 66
4.10.3. Slide 9: switching two observations........................................................................................................................................... 67
4.10.4. Correlation is dynamic..................................................................................................................................................................... 67
4.10.5. Two-asset opportunity set and efficient frontier.................................................................................................................. 68
4.10.6. Many assets and diversification breadth.................................................................................................................................. 68
4.10.7. Selecting one efficient portfolio with risk aversion.............................................................................................................. 68
4.10.8. Why a static efficient portfolio may not be behaviorally sufficient...............................................................................69
3
, 4.10.9. Goals-based investing: translating preferences..................................................................................................................... 69
4.10.10. Goal Probability and Loss Threshold curves........................................................................................................................ 69
4.10.11. Adaptive method 1: switching along the efficient frontier............................................................................................. 70
4.10.12. Adaptive method 2: static strategy weights......................................................................................................................... 71
4.10.13. Slow thinking selects the category; fast thinking selects the mix................................................................................71
4.10.14. Probability matching experiment............................................................................................................................................. 71
4.10.15. Three-step probability-matching portfolio algorithm...................................................................................................... 72
4.10.16. Worked probability-matching example................................................................................................................................. 72
4.10.17. Comparing the two adaptive approaches.............................................................................................................................. 73
4.10.18. Behavioral portfolio theory: finance for normal people.................................................................................................. 73
4.10.19. Comfort-zone investing................................................................................................................................................................ 73
4.10.20. Communication and reporting as part of portfolio construction.................................................................................74
4.10.21. Model answer structure for an integrated portfolio question....................................................................................... 74
4
