Naïve Buying Diversification and Narrow Framing by Individual Investors

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

Journal of Finance, 2023, vol. 78, issue 3, 1705-1741

Abstract: We provide the first tests to distinguish whether individual investors equally balance their overall portfolios (naïve portfolio diversification, NPD) or, in contrast, equally balance the values of same‐day purchases of multiple assets (naïve buying diversification, NBD). 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. Evidence suggests that NBD arises due to stock picking behavior and neglect of diversification. These findings suggest that behavioral finance theory should incorporate transaction, as well as portfolio, framing.

Date: 2023
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https://doi.org/10.1111/jofi.13222

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Working Paper: Naïve *Buying* Diversification and Narrow Framing by Individual Investors (2019)
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