Summary

Individual investors buying multiple stocks on the same day often use a naïve diversification 1/N heuristic, dividing purchase value equally across stocks. Yet very few investors maintain a 1/N portfolio allocation. Instead, investors appear to narrowly frame their buy-day decision independently of their portfolio, applying the 1/N heuristic only for new purchases. The use of this heuristic decreases, but does not disappear, as financial stakes and investor trading experience increase. These findings indicate that the simple heuristics individual investors use in practice depart further from rationality than is often assumed even in behavioral models of investment decisions.

Details: NBER and SSRN Working Papers (acknowledges both NIBS 1 and NIBS 2 funding).

Authors:   John Gathergood, David A. Hirshleifer, David Leake, Hiroaki Sakaguchi and Neil Stewart