Narrow Framing and Under-Diversification: Empirical Evidence from Chinese Households

46 Pages Posted: 19 Feb 2021

See all articles by Yuxin Xie

Yuxin Xie

Southwestern University of Finance and Economics, The School of Securities and Futures

Ruohua Tang

Southwestern University of Finance and Economics (SWUFE) - School of Securities and Futures

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics

Xiaomeng Lu

Southwestern University of Finance and Economics (SWUFE)

Date Written: December 19, 2020

Abstract

“Narrow framing” is a widely documented behavioral bias that predicts, instead of evaluating all their risk components as a whole, people often evaluate risks in isolation, separately from other risks they are already facing. Using representative survey data from the China Household Finance Survey (CHFS), we estimate the extent of narrow framing among Chinese households, using their portfolio choices. Conditional on stock market participation, we find most Chinese households exhibit significant narrow framing. Based on the obtained estimates, we investigate whether the variation in narrow framing can help to explain households’ diversification decisions cross-sectionally. Our results support the theory that narrow framing negatively predicts the extent of diversification. Most importantly, we argue that narrow framing is an irreplaceable ingredient of understanding households' portfolio choices, even after considering measurement error and a wide set of indicators of under-diversification.

Keywords: household finance; narrow framing; portfolio under-diversification; asset allocation

JEL Classification: G10; G11; G5; D9

Suggested Citation

Xie, Yuxin and Tang, Ruohua and Pantelous, Athanasios A. and Lu, Xiaomeng, Narrow Framing and Under-Diversification: Empirical Evidence from Chinese Households (December 19, 2020). Available at SSRN: https://ssrn.com/abstract=3751769 or http://dx.doi.org/10.2139/ssrn.3751769

Yuxin Xie

Southwestern University of Finance and Economics, The School of Securities and Futures ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Ruohua Tang

Southwestern University of Finance and Economics (SWUFE) - School of Securities and Futures ( email )

Chengdu
China

Athanasios A. Pantelous (Contact Author)

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Xiaomeng Lu

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China
+86 18010560935 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
44
Abstract Views
160
PlumX Metrics