Domain-dependent Diversification: The Influence of Gain-loss Domain and Information Aggregation on Correlation Choice

43 Pages Posted: 27 Aug 2021

See all articles by Charlotte Borsboom

Charlotte Borsboom

Radboud University Nijmegen

Darren Duxbury

Newcastle University Business School

Stefan Zeisberger

Radboud University, Institute for Management Research; University of Zurich, Department of Banking and Finance

Date Written: August 5, 2021

Abstract

Despite the compelling evidence on gain-loss-domain-dependent behavior, research on domain-dependent portfolio diversification is scarce. In an online experimental study, we recruited 251 experienced US retail investors to select portfolios that differ in asset correlation and risk measures in both the gain and the loss domain. Our findings unveil that diversification behavior is domain-dependent and interacts with the level of information aggregation. Presenting aggregated portfolio outcomes prompts portfolio choices consistent with prospect theory risk preferences and generally higher levels of portfolio diversification. In contrast, displaying individual stock outcomes results in more diversified portfolios in the loss compared to the gain domain on average, in line with previous evidence suggesting that individuals do not accurately understand the concept of portfolio diversification.

Keywords: behavioral finance, experimental finance, diversification, domain dependency, asset correlation, counter-cyclical risk aversion, stock market conditions

JEL Classification: D14, D18, G11, G41

Suggested Citation

Borsboom, Charlotte and Duxbury, Darren and Zeisberger, Stefan, Domain-dependent Diversification: The Influence of Gain-loss Domain and Information Aggregation on Correlation Choice (August 5, 2021). Available at SSRN: https://ssrn.com/abstract=3905832 or http://dx.doi.org/10.2139/ssrn.3905832

Charlotte Borsboom

Radboud University Nijmegen ( email )

Postbus 9108
Nijmegen, 6500 HK
Netherlands

Darren Duxbury

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom
+44(0)191 208 1517 (Phone)

HOME PAGE: http://www.ncl.ac.uk/nubs/staff/profile/darren.duxbury

Stefan Zeisberger (Contact Author)

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

University of Zurich, Department of Banking and Finance ( email )

Zürich
Switzerland

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