Application of Behavioral Portfolio Theory in Investment Decisions

Behavioral Portfolio Theory suggests that investors construct their portfolios based on their personal experiences, goals, and psychological factors rather than solely on traditional risk-return trade-offs. This theory highlights that individuals may have different 'mental accounts,' which lead them to segregate their investments according to various objectives.

Consider a portfolio manager who uses Behavioral Portfolio Theory. Which of the following statements best illustrates an application of this theory in portfolio decision-making?