behavorially modified asset allocation

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theCFAway

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I’m re-reading this sentence over and over again as part of the bullet points to look out for with behavioral modified asset allocation, but not really understanding what it means..
“the lower the suggested deviaton from the rational portfolio asset allocaton, the greater the need to mitigate the investor’s behavorial biases”
why is it “lower” and not “higher”?
 
perhaps they mean a lower std deviation equates to less risk tolerance, and thus greater need to mitigate
it is a poorly written sentence
 
you are very close to the rational allocation. (so deviation is LOW). That means your behavioral biases are higher.
 
the CLOSER to rational allocation - doesnt it indicate the lesser the biases (more rational?) CP?
 
the lower the “suggested” deviation, means the suggested allocation is close to the rational allocation. Therefore you will need to modify biases to bring them closer to the suggested and rational allocations.
 
From another viewpoint:
Take two investors, 1) Investor that has low current wealth versus higher future needs; and 2) an investor who has accumulated a lot of wealth and whose future obligations are minimal compared to their current level of wealth.
The first investor would have to have a lower standard deviation versus the optimal portfolio, as any unwanted deviation could have a large effect on his/her standard of living. The second investor can deviate from the optimal allocation by a larger amount, as his/her standard of living is less at risk. As a result, it is more important to mitigate the behavioral biases of the investor whose suggested allocation has a lower standard deviation versus the optimal portfolio.
 
itsmclovin wrote:the lower the “suggested” deviation, means the suggested allocation is close to the rational allocation. Therefore you will need to modify biases to bring them closer to the suggested and rational allocations.
Click to expand...
This seems the most reasonable interpretation: if the allowable deviations are whacking big, you don’t need your client to be all that rational; if the allowable deviations are teensy-weensy, you need to call in the men in the white jackets with the straightwaistcoat.
 
here is how the sentence wants you to think:
The lower the persons’s ability to deviate from the rational (optimal) allocation, the more mitigation is needed. if someone has very little ability to deviate from the optimal portfolio they are in jeopardy of not meeting their investment goals and behaviour biases must be controlled. if a billionaire has a spend of $50k per year in perpetuity he has a very high ability to deviate from the suggested rational (optimal allocation) so less mitigation is needed - he has very little risk of not meeting his investment goals (whether he is optimal or not - he’s got cash to fund his lifestyle) so let his behaviour biases go unchecked, especially if they help him sleep at night
 
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