Irrational diversification: An examination of individual portfolio choice

Guido Baltussen, Gerrit T. Post

Research output: Contribution to journalArticlepeer-review

28 Citations (Scopus)


We study individual portfolio choice in a laboratory experiment and find strong evidence for heuristic behavior. The subjects tend to focus on the marginal distribution of an asset, while largely ignoring its diversification benefits. They follow a conditional 1/n diversification heuristic as they exclude the assets with an "unattractive" marginal distribution and divide the available funds equally between the remaining "attractive" assets. This strategy is applied even if it leads to allocations that are dominated in terms of first-order stochastic dominance and is clearly irrational. In line with these findings, we find that framing and problem presentation have substantial influence on portfolio decisions.

Original languageEnglish
Pages (from-to)1463-1491
Number of pages29
JournalJournal of Financial and Quantitative Analysis
Issue number5
Publication statusPublished - Oct 2011

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


Dive into the research topics of 'Irrational diversification: An examination of individual portfolio choice'. Together they form a unique fingerprint.

Cite this