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Naïve *Buying* Diversification and Narrow Framing by Individual Investors

John Gathergood, David Hirshleifer, David Leake, Hiroaki Sakaguchi, Neil Stewart

NBER Working Paper No. 25567
Issued in February 2019, Revised in February 2020
NBER Program(s):Asset Pricing

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.

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Document Object Identifier (DOI): 10.3386/w25567

 
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