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Portfolio diversification: the influence of herding, status-quo bias, and the gambler’s fallacy

Ibrahim Filiz (), Thomas Nahmer (), Markus Spiwoks () and Kilian Bizer ()
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Ibrahim Filiz: Ostfalia University of Applied Sciences
Thomas Nahmer: Georg August University Göttingen
Markus Spiwoks: Ostfalia University of Applied Sciences
Kilian Bizer: Georg August University Göttingen

Financial Markets and Portfolio Management, 2018, vol. 32, issue 2, 167-205

Abstract: Abstract This experimental study examines the influence of herding [following the majority of fellow gamblers or the most successful gambler (guru)], status-quo bias, and the gambler’s fallacy on diversification behavior. We find that neither herding nor status-quo bias contributes significantly to non-optimal portfolio choices. The gambler’s fallacy, however, plays an important role in these decisions. Many subjects appear to find patterns in a history of random events and then use these “patterns” to infer the sequence of future events. The gambler’s fallacy is significantly responsible for the fact that the optimal structure of a portfolio is considered in only 37.7% of all choices made by an investor.

Keywords: Behavioral finance; Experiments; Portfolio choice; Non-optimal diversification; Herding; Guru; Status-quo bias; Gambler’s fallacy (search for similar items in EconPapers)
JEL-codes: G02 G11 D81 D84 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:kap:fmktpm:v:32:y:2018:i:2:d:10.1007_s11408-018-0311-x