Naïve Buying Diversification and Narrow Framing by Individual Investors

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

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.

Citation

Gathergood, J., Hirshleifer, D., Leake, D., Sakaguchi, H., & Stewart, N. (2023). Naïve Buying Diversification and Narrow Framing by Individual Investors. Journal of Finance, 78(3), 1705-1741. https://doi.org/10.1111/jofi.13222

• Journal Article Type: Article
• Acceptance Date: Jun 8, 2022
• Online Publication Date: Mar 20, 2023
• Publication Date: 2023-06
• Deposit Date: Oct 17, 2022
• Publicly Available Date: Mar 20, 2023
• Journal: Journal of Finance
• Print ISSN: 0022-1082
• Electronic ISSN: 1540-6261
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 78
• Issue: 3
• Pages: 1705-1741
• DOI: https://doi.org/10.1111/jofi.13222
• Keywords: Economics and Econometrics; Finance; Accounting
• Public URL: https://nottingham-repository.worktribe.com/output/12599336
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/jofi.13222