Adaptive behavior leads to under-diversification

  title={Adaptive behavior leads to under-diversification},
  author={Uri Ben Zion and Ido Erev and Ernan Haruvy and Tal Shavit},
In a given period, a diversified fund, by virtue of being a weighted average, will perform somewhere in the middle range of its components’ respective performances. This means that adaptive investors who look to the past to adjust expectations about future returns will shun diversified funds. That is, adaptive reaction to feedback implies under-diversification when the investor gets complete feedback on the performance of the diversified fund as well as its components in a given period. Three… CONTINUE READING