How Elementary is Diversification? A Study of Children's Portfolio Choice

36 Pages Posted: 15 Aug 2017 Last revised: 11 Dec 2017

See all articles by Enrico G. De Giorgi

Enrico G. De Giorgi

University of St. Gallen - SEPS: Economics and Political Sciences

Ola Mahmoud

University of California, Berkeley; University of Zurich

Date Written: December 9, 2017

Abstract

Diversification is a fundamental concept in economics, decision theory, and finance, but the way in which it is implemented in the real world varies greatly. This paper asks how elementary the notion of diversification is by studying whether children apply it as a choice heuristic. We report on results of an experiment that tests whether children diversify in a sequence of hypothetical choice questions and dice-rolling games. Overall, we find that children do exhibit preferences for diversification, both for the sake of variety across consumption goods and for the purpose of mitigating risk when faced with a choice across risky gambles. The naive diversification heuristic, which implies an equal allocation across alternatives, is particularly evident in children's choices when the alternatives are equivalent or unknown. We also investigate the relationship between risk aversion and diversification and find no significant connection between the two. Our results indicate that diversification preferences may have fundamental, developmental roots, which contrasts with the traditional normative view of diversification, in which most economic models take diversification preferences as exogenously given. This may have implications for how one can treat investment anomalies in practice and, in particular, promotes financial literacy training from a young age.

Keywords: diversification, portfolio choice, risk aversion, children's decision making

JEL Classification: C91, D01, D11, D80, D91, G11

Suggested Citation

De Giorgi, Enrico G. and Mahmoud, Ola, How Elementary is Diversification? A Study of Children's Portfolio Choice (December 9, 2017). Available at SSRN: https://ssrn.com/abstract=3018421 or http://dx.doi.org/10.2139/ssrn.3018421

Enrico G. De Giorgi

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Department of Economics
Bodanstrasse 6
CH-9000 St. Gallen
Switzerland
+41712242430 (Phone)

Ola Mahmoud (Contact Author)

University of California, Berkeley ( email )

Center for Risk Management Research
Evans Hall
Berkeley, CA 94720
United States

University of Zurich ( email )

Sch├Ânberggasse 1
Z├╝rich, 8001
Switzerland

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