CHAPTER 2A Theoretical Foundation

“There is nothing more practical than a good theory.”

Kurt Lewin

I think of theory like a map. A map is not reality, of course, but a good map can lead you to your destination much more readily than a bad one. In some cases, the map is accurate but not detailed. We call that a heuristic (or rule‐of‐thumb). A heuristic works because it is picking up some underlying truth, even though the justification for it may be wrong. Sometimes the map is mostly right, but is wrong in the details. We might be able to use it to get a sense of where we are going, but we may just as easily wind up lost. In other cases, the map is simply wrong, rendering it useless. In that case, we have to throw the map away, explore the unknown area, and draw a new map. As I have witnessed in my own practice, poor theory can lead to poor practical outcomes, but it is not enough to simply decry the map altogether. We must understand why the map is leading us astray. Is it entirely wrong? Or is it simply that the map is not detailed enough? Understanding where and why the map is wrong is an important component to drawing a new one! In my view, traditional portfolio theory is not an entirely useless map (though it is popular to paint it as such). Rather, it is a map that is mostly right some of the time, but often wrong in the details. I see current portfolio theory like one of those early post‐Columbian maps showing that North America exists, but not in a way that helps you ...

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