Naïve Buying Diversification and Narrow Framing by Individual Investors

83 Pages Posted: 21 Oct 2017 Last revised: 16 Feb 2020

See all articles by John Gathergood

John Gathergood

University of Nottingham - School of Economics

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; National Bureau of Economic Research (NBER)

David Leake

Independent

Hiroaki Sakaguchi

University of Warwick

Neil Stewart

Warwick Business School, University of Warwick

Date Written: February 12, 2020

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: investor behavior, portfolio allocation, naive diversification, narrow bracketing

JEL Classification: G11, G12, G02, D14, D91

Suggested Citation

Gathergood, John and Hirshleifer, David A. and Leake, David and Sakaguchi, Hiroaki and Stewart, Neil, Naïve Buying Diversification and Narrow Framing by Individual Investors (February 12, 2020). Available at SSRN: https://ssrn.com/abstract=3056254 or http://dx.doi.org/10.2139/ssrn.3056254

John Gathergood (Contact Author)

University of Nottingham - School of Economics ( email )

Sir Clive Granger Building
University Park
Nottingham, NG7 2RD
United Kingdom

HOME PAGE: http://https://sites.google.com/site/gathergoodjohn/

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Leake

Independent ( email )

Hiroaki Sakaguchi

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Neil Stewart

Warwick Business School, University of Warwick ( email )

Gibbet Hill Road
Coventry, West Midlands CV4 8UW
United Kingdom

HOME PAGE: http://www.stewart.warwick.ac.uk

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