Lloyds Banking Group
Institutional Affiliation: Lloyds Banking Group
NBER Working Papers and Publications
|February 2019||Naïve *Buying* Diversification and Narrow Framing by Individual Investors|
with John Gathergood, David Hirshleifer, Hiroaki Sakaguchi, Neil Stewart: w25567
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.