Domain-dependent diversification: The influence of gain–loss domain on correlation choice

Charlotte Borsboom, Darren Duxbury, Alexander Nieber and Stefan Zeisberger

Journal of Economic Behavior & Organization, 2024, vol. 227, issue C

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 economics; Experimental finance; Diversification; Domain dependency; Correlation (search for similar items in EconPapers)
JEL-codes: D14 D18 G11 G41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:227:y:2024:i:c:s0167268124002774

DOI: 10.1016/j.jebo.2024.106681

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