Dollar Cost Averaging - The Role of Cognitive Error

27 Pages Posted: 15 Sep 2009 Last revised: 21 Jan 2012

See all articles by Simon Hayley

Simon Hayley

City University London - Sir John Cass Business School

Date Written: January 14, 2012

Abstract

Dollar Cost Averaging (DCA) has long been shown to be an inefficient investment strategy in mean/variance terms, yet it remains very popular. Recent research has attempted to explain this popularity by assuming more complex investor preferences. However, this paper demonstrates that DCA is a sub-optimal strategy regardless of the form taken by investor preferences over terminal wealth. Instead it offers a simpler explanation: that DCA’s continued popularity is due to a specific and demonstrable cognitive error in the key argument that is normally put forward in favor of the strategy. This explanation brings very different welfare implications.

Keywords: Dollar cost averaging, investment, behavioral finance

JEL Classification: G10, G11

Suggested Citation

Hayley, Simon, Dollar Cost Averaging - The Role of Cognitive Error (January 14, 2012). Available at SSRN: https://ssrn.com/abstract=1473046 or http://dx.doi.org/10.2139/ssrn.1473046

Simon Hayley (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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