In 1738, the Swiss mathematician and physicist Daniel Bernoulli proposed a simple thought experiment:
“A rich prisoner who possesses two thousand ducats but needs two thousand ducats more to repurchase his freedom, will place a higher value on a gain of two thousand ducats than does another man with less money than he.”
Let’s continue to play this out and place Bernoulli’s prisoner within the context of modern markets and ask him to evaluate various investments. What becomes immediately clear is that his ducats are dedicated to one objective: getting the heck out of prison!
Our prisoner has a goal for his money, just like we do.
Our prisoner can invest his ducats as he sees fit, and because he wants to maximize his chances of release, we can describe his use for various investments with goals-based portfolio theory…
[…read more at the CFA Institute’s Enterprising Investor Blog…]