Naïve Buying Diversification and Narrow Framing by Individual Investors
83 Pages Posted: 21 Oct 2017 Last revised: 16 Feb 2020
Date Written: February 12, 2020
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: Suggested Citation