TY - JOUR
T1 - Irrational diversification
T2 - An examination of individual portfolio choice
AU - Baltussen, Guido
AU - Post, Gerrit T.
N1 - Funding Information:
∗Baltussen, [email protected], Erasmus School of Economics, Burgemeester Oudlaan 50, Rotterdam 3000 DR, The Netherlands, and New York University; Post, [email protected], Graduate School of Business, Koc¸ University, Rumelifeneri Yolu, Istanbul 34450, Turkey. Financial support by Tinbergen Institute, Erasmus Research Institute of Management, Erasmus Center of Financial Research, Erasmus Trustfonds, ING Investment Management, and Robeco Asset Management is gratefully acknowledged. We thank Elena Asparouhova (the referee), Shlomo Benartzi, Hendrik Bessembinder (the editor), Werner De Bondt, Haim Levy, Kasper Meisner Nielsen, Jaap Spronk, Philippe Versijp, Pim van Vliet, and seminar participants at the 2008 Behavioral Decision Research in Management (BDRM) conference in San Diego, the 2010 Financial Management Association (FMA) meeting in New York, the Erasmus School of Economics, University of Amsterdam, and Tinbergen Institute for very helpful comments and discussions. Any remaining errors are the authors’ responsibility.
PY - 2011/10
Y1 - 2011/10
N2 - 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.
AB - 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.
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U2 - 10.1017/S002210901100041X
DO - 10.1017/S002210901100041X
M3 - Article
AN - SCOPUS:82655189249
SN - 0022-1090
VL - 46
SP - 1463
EP - 1491
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 5
ER -