The 1/N Rule Revisited: Heterogeneity in the Naïve Diversification Bias

Abstract

This paper examines the naïve diversification bias, the tendency of consumers to diversify their investments beyond what is justifiable on economically rational grounds (Benartzi & Thaler, 2001). The naïve diversification bias is replicated across different samples using a within-participant manipulation of portfolio options. Only differences in focus on intuition predicted this bias. The more investors use intuitive judgments, the more likely they are to display the naïve diversification bias.

Keywords: Naïve Diversification Bias, Financial Decision Making, Variety-Seeking, Heuristics, Intuitive Judgments.