Working Paper: NBER ID: w25567
Authors: John Gathergood; David Hirshleifer; David Leake; Hiroaki Sakaguchi; Neil Stewart
Abstract: We provide the first tests to distinguish whether individual investors equally balance their overall portfolios (naïve portfolio diversification—NPD) or engage in naïve buying diversification (NBD)—equally balancing values in same-day purchases of multiple assets. We find NBD in purchases of multiple stocks, and in mixed purchases of individual stocks and funds. In contrast, there is little evidence of NPD. So investors seem to narrowly frame their buy-day decision. Simulation analysis suggests that NBD substantially reduces investor welfare. These findings suggest that behavioral finance theory should incorporate transactional as well as portfolio framing.
Keywords: naive diversification; narrow framing; behavioral finance; individual investors; portfolio theory
JEL Codes: D14; D53; D91; G02; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| NBD (Y60) | poor portfolio performance (G11) |
| NBD (Y60) | suboptimal portfolio performance (G11) |
| NBD leads to arbitrary disparities in portfolio weights (G40) | suboptimal portfolio performance (G11) |
| NPD (H69) | optimal diversification (G11) |
| Investor experience increases (G11) | likelihood of using NBD decreases (C24) |
| Financial stakes increase (G32) | likelihood of using NBD decreases (C24) |