Mental Accounting in LP Portfolio Construction: Pros and Cons

Balancing Intuition and Rationality in LP Investment

In the world of finance and investment, portfolio construction is both an art and a science. LPs often face complex decisions when allocating their resources. One psychological phenomenon that significantly influences these decisions is mental accounting. Coined by behavioral economist Richard Thaler, mental accounting refers to the tendency of individuals to categorize and treat money differently depending on its source, purpose, or intended use. While this cognitive bias can simplify decision-making, it can also lead to suboptimal outcomes in portfolio construction. In this blog post, we’ll explore the pros and cons of mental accounting in LP portfolio construction.