NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Hiroaki Sakaguchi

Tokyo
Japan

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: University of Warwick

NBER Working Papers and Publications

February 2019Naïve *Buying* Diversification and Narrow Framing by Individual Investors
with John Gathergood, David Hirshleifer, David Leake, Neil Stewart: w25567
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.
 
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