Which of the following best describes the potential problem with Mr. Higgins’s investment strategy?
a. He will underestimate the risk of his portfolio and underestimate the impact of an event on stocks.
b. He will overestimate the risk of his portfolio and overestimate the impact of an event on stocks.
c. He will underestimate the risk of his portfolio and overestimate the impact of an event on stocks.

Terry Shriver and Mary Trickett are portfolio managers for High End Investment Managers. As part of their annual review of their client portfolios, they consider the appropriateness of their client portfolios given their clients’ investment policy. Their boss, Jill Castillo, is concerned that Shriver and Trickett allow the clients’ behavioral biases to enter into the asset allocation decision, so she has asked them to review their notes from meetings with clients. The information below is excerpted from their notes regarding the clients named.
Tom Higgins: “In the past five years, I have consistently outperformed the market averages in my stock portfolio. It really does not take a genius to beat a market average, but I am proud to say that I Chapter 8 Behavioral Finance and the Psychology of Investing 293 have beaten the market averages by at least 2 percent each year and have not once lost money. I would continue managing my portfolio myself, but with a new baby and a promotion, I just don’t have time.”
Joanne McHale: “The last three quarters were bad for my portfolio. I have lost about a third of my value, primarily because I invested heavily in two aggressive growth mutual funds that had bad quarters. I need to get back one-third of my portfolio’s value because I am only 15 years away from retirement and I don’t have a defined-benefit pension plan. Because of this, I am directing Mary Trickett to invest my savings in technology mutual funds. Their potential return is much higher, and I believe I can recover my losses with them.”
Jack Sims: “I enjoy birdwatching and hiking. I am an avid environmental advocate and will only invest in firms that share my concern for the environment. My latest investment was in Washington Materials, which was recently featured in an environmental magazine for its outstanding dedication to environmental protection.”