Naïve Buying Diversification and Narrow Framing by Individual Investors

74 Pages Posted: 21 Oct 2017 Last revised: 14 Mar 2019

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; NBER

David Leake

Independent

Hiroaki Sakaguchi

University of Warwick

Neil Stewart

Warwick Business School, University of Warwick

Date Written: March 13, 2019

Abstract

Individual investors buying multiple stocks on the same day often use a naïve diversification 1/N heuristic, dividing purchase value equally across stocks. Yet very few investors maintain a 1/N portfolio allocation. Instead, investors appear to narrowly frame their buy-day decision independently of their portfolio, applying the 1/N heuristic only for new purchases. The use of this heuristic decreases, but does not disappear, as financial stakes and investor trading experience increase. These findings indicate that the simple heuristics individual investors use in practice depart further from rationality than is often assumed even in behavioral models of investment decisions.

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 (March 13, 2019). 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 )

Irvine, CA California 92697-3125
United States

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

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Leake

Independent ( email )

No Address Available

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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