Naïve *Buying* Diversification and Narrow Framing by Individual Investors

84 Pages Posted: 19 Feb 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

Lloyds Banking Group

Hiroaki Sakaguchi

University of Warwick

Neil Stewart

Warwick Business School, University of Warwick

Date Written: February 2019

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.

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 2019). NBER Working Paper No. w25567, Available at SSRN: https://ssrn.com/abstract=3336519

John Gathergood (Contact Author)

University of Nottingham - School of Economics ( email )

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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/

NBER ( email )

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David Leake

Lloyds Banking Group ( email )

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London, EC2V 7AE
United Kingdom

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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