Irrational diversification: An examination of individual portfolio choice

Guido Baltussen, Gerrit T. Post

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

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
Volume46
Issue number5
DOIs
Publication statusPublished - Oct 2011
Externally publishedYes

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Diversification
Assets
Portfolio choice
Heuristics
Laboratory experiments
Stochastic dominance
Diversification benefits

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Irrational diversification : An examination of individual portfolio choice. / Baltussen, Guido; Post, Gerrit T.

In: Journal of Financial and Quantitative Analysis, Vol. 46, No. 5, 10.2011, p. 1463-1491.

Research output: Contribution to journalArticle

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