Behavioral Portfolio Theory and Mental Accounting

Sarah is a financial advisor who specializes in wealth management. She recently attended a seminar on Behavioral Portfolio Theory, which has led her to consider how clients derive utility from their portfolios. Sarah is particularly interested in the implications of this theory for multi-faceted portfolio construction, where clients prefer to segregate their portfolios based on different mental accounts such as retirement savings, education funds, and discretionary spending. Using this framework, Sarah is analyzing a hypothetical client, John, who has risk tolerance and investment goals for his retirement and children's education.

John's behavioral biases suggest that he may value his retirement portfolio differently than his children's education fund. Sarah is assessing how this might influence her asset allocation strategy for him. Given John's tendency to prioritize emotional satisfaction through investment outcomes, she wonders which of the following statements aligns most closely with the principles of Behavioral Portfolio Theory regarding John's situation.