Many investors take a bottom-up approach - they select holdings based on individual investment cases, rather than looking at the reward-to-risk profile of their portfolio as a whole. One of the main problems in moving towards more holistic strategies, however, is the historic difficulty in quantifying (and therefore managing) risk adequately.
In the past, flawed statistical models have prevailed for reasons of mathematical expediency (see box: Bell tolls for Gaussian assumptions). Therefore, the most sensible way for many people to manage risk has been by mental accounting: they view equity holdings as separate from other assets and sources of income, so are happy to pick stocks on the individual investment cases, as this is 'the risky stuff' anyway.
Mental accounting is perfectly valid, especially if it ensures mistakes aren't costing people their homes or money they depend on to get by, although thinking more scientifically about portfolio construction can help achieve the most efficient trade-off between risk and potential returns. As a caveat, no risk management system can ever be perfect and there is still no substitute for common sense. The first rule of investing should be not to put money on the line if an adverse outcome would prove ruinous.