Domain-Dependent Diversification: The Influence of Gain-loss Domain on Correlation Choice

40 Pages Posted: 27 Aug 2021 Last revised: 3 Apr 2024

See all articles by Charlotte Borsboom

Charlotte Borsboom

Radboud University Nijmegen

Darren Duxbury

Newcastle University Business School

Alexander Nieber

Radboud University Nijmegen - Institute for Management Research

Stefan Zeisberger

Radboud University, Institute for Management Research; University of Zurich, Department of Banking and Finance

Date Written: April 2, 2024

Abstract

Despite compelling evidence of widespread gain-loss-domain-dependent behavior, research on domain-dependent diversification is scarce. We recruited 251 experienced US retail investors to participate in a controlled experiment with the task to select portfolios that differ in asset correlation and hence diversification benefits in both the gain and the loss domain. We find evidence of domain-dependent diversification, both unconditional and conditional on benchmark portfolio preferences. Consistent with a loss-attention hypothesis, diversification errors are not observed in the loss domain, but are clearly present in the gain domain (with much lower diversification relative to the benchmark).

Keywords: behavioral finance, experimental finance, diversification, domain dependency, asset correlation, counter-cyclical risk aversion, stock market conditions

JEL Classification: D14, D18, G11, G41

Suggested Citation

Borsboom, Charlotte and Duxbury, Darren and Nieber, Alexander and Zeisberger, Stefan, Domain-Dependent Diversification: The Influence of Gain-loss Domain on Correlation Choice (April 2, 2024). Available at SSRN: https://ssrn.com/abstract=3905832 or http://dx.doi.org/10.2139/ssrn.3905832

Charlotte Borsboom

Radboud University Nijmegen ( email )

Postbus 9108
Nijmegen, 6500 HK
Netherlands

Darren Duxbury

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom
+44(0)191 208 1517 (Phone)

HOME PAGE: http://www.ncl.ac.uk/nubs/staff/profile/darren.duxbury

Alexander Nieber

Radboud University Nijmegen - Institute for Management Research ( email )

Nijmegen
Netherlands

Stefan Zeisberger (Contact Author)

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

University of Zurich, Department of Banking and Finance ( email )

Zürich
Switzerland

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