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Subject:  Modeling Investment Choices Date:  11/21/2012  9:19 PM
Author:  trader2012 Number:  34518 of 35876

One of the spin-offs of the unproven hypothesis widely known as ‘Modern Portfolio Theory’ is ‘Investor Profiling’ in which would-be investors make a series of choices and then are directed toward the proper asset-allocation for their personality/life stage. This technique --though mostly as much garbage as its parent-- is highly germane to the discussion I’ve launched in another thread with my nemesis in this forum. But set aside, for a moment, the personalities of the two players and consider just the following choice:

“Would you rather have an investment that offered zero loss, but a limited upside of X (+/-Y), or an investment whose downside was X (+/- 2Y) but whose upside was 2x-4x?”

Forget about the numbers. Just focus on the relationships. In one case, there is no chance you will lose nominal principal and absolute certainty that you will do better than break even. In the other case, you might make decent money, but you might lose a substantial amount as well.

It is highly likely that those who are uncomfortable with financial uncertainty (short-term or long-term) will favor the first choice, and those who are comfortable with short-term financial uncertainly --but very uncomfortable with long-term financial certainty-- will favor the seco