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This style of analysis applies equally well to a situation where you have a single stock that is highly appreciated. Your assumption of the expected return of the single stock will be a critical input, but in most cases we've analyzed with a realistic single stock return assumption, the Expected Utility analysis has been pretty consistent in its recommendation to reduce appreciated but highly concentrated holdings. This is because lower risk tends to outweigh lower expected wealth from paying taxes sooner on realized gains.
The Missing Billionaires
Victor Haghani and James White
And isn’t it obvious who these are? Women have two (a romantic partner and a Best Friend Forever, who is usually another girl), but men only have one (either a romantic partner or a drinking buddy, who is obviously male) because they can’t manage both at the same time. And just in case you think that these might be wife-and-mistress or husband-and-lover combinations, I’ll anticipate a finding from chapter 12 which rather strongly suggests that, when people do have an extra romantic interest of this kind, the original partner is rarely included even in the 5-layer, never mind the 2-layer.
The error equation does not apply to evaluative judgments, however, because the concept of error, which depends on the existence of a true value, is far more difficult to apply. Furthermore, even if errors could be specified, their costs would rarely be symmetrical and would be unlikely to be precisely proportional to their square.
Noise
Daniel Kahneman, Olivier Sibony, and Cass R. Sunstein
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