Concentrated Wealth in Behavioral Portfolios

Concentration in wealth portfolios is always an error by the rules of mean–variance portfolio theory because concentration increases variance without increasing expected returns. Yet by the rules of behavioral portfolio theory, concentration can be a purposeful and sometimes necessary feature in portfolios designed to serve human aspirations. Behavioral portfolio theory recognizes that investors possess more than one aspiration and pursue more than one goal. These aspirations and goals are reflected in the layers of their portfolios. Investors’ aspirations in not-poor layers are avoiding falls into poverty, and their goals are acceptable standards of living. In contrast, investors’ aspirations in the be-rich layers are reaching transformative outcomes, and their goals are homeownership, financial independence, and/or elevated social status. Concentrated positions are located in be-rich layers because only high-variance investments offer meaningful chances of reaching transformative outcomes when initial wealth is limited.