Kahneman spoke about his strategy for “regret-proof” investing at a recent Morningstar conference in Chicago. He and his colleague, Amos Tversky, developed the concept of loss aversion—the fact that losses hurt more than gains feel good... Kahneman extended this idea and created a “regret minimization” strategy while working with a team that did what he described as “financial advising for very wealthy people” at Guggenheim Partners. Kahneman’s view is that investment planning must strike a balance between wealth maximization and regret.
The solution the team came up with was to design two portfolios, one risky and one safer, based on the “regret propensity” for each individual investor. The two portfolios are then managed and reported separately. This establishes a psychological distance between the two and allows the investor to feel safer, even though, in reality, they are both part of the same portfolio.
General Discussion on the Permanent Portfolio Strategy
Moderator: Global Moderator
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I highly recommend Michael Lewis's "The Undoing Project", which is largely a biography of Tversky and Kahneman, and also goes into detail of their fascinating work.