Behavioral Portfolio Theory - EOC Q Page 48 #5

Hows is the answer behavioral portfolio theory? The definition of BPT is holding a non-diversified portfolio, pyramiding, mental accounting etc.

I see that other 2 answers are no good but I dont get how answer C describes BPT

i thought BPT is diversified but not efficient?

Diversification is only conincidental, it’s definitely not efficient.

client says that they have a … "disciplined approach to investing. When a stock has appreciated by 15 percent, I sell it. Also, I sell a stock when its price has declined by 25 percent from my initial purchase price. " On page 41 , in the BPT section up near the top of the page: Further, the portfolios of investors reluctant to realize losses may continue to hold some securities not because of the securities potential, but rather because of the investors aversion to realize losses. So he is reluctant to sell losers and sells gainers too quickly , exactly as the BPT says he would .

and that is different from prospect theory/ loss aversion (choice B) how?

The answer says that:

“Loss aversion in prospect theory is discussed from a different perspective”

Of course when I first did this problem , that was the one I chose ( i.e. prospect theory). The prospect theory definition matches the above statement very closely.

However when I read it now, it seems that prospect theory is more general , concerned about how investors behave in the domain of gains and losses. They might flip between being loss averse to being risk averse depending on their change in wealth level.

for example they would treat all stocks with a loss-averse view when they are in a losing situation and all stocks with a risk-averse view whe they are in a winning situation.

Here it is very specific , they guy does it in a disciplined way , might even have a computer program to do it. Sell a stock that is fallen 25% , sell a stock that has risen 15% . Doesn’t matter how much the change in wealth .

Quite fishy but for the sparseness of the material in the text , somewhat understandable

thanks for this explanation. the way i will remember then is that prospect theory and the associated loss aversion is when you have loss aversion and sell winners too quick or hold onto losers to long–your focus is on not fear of recognizing a loss. however, for behavioral portfolio theory, the key is that you make the same decisions but IRRESPECTIVE OF FUNDAMENTIALS OR POTENTIAL. i guess you have to look out for language saying something to the effect.