Adaptive behavior leads to under-diversification

@article{Zion2010AdaptiveBL,
  title={Adaptive behavior leads to under-diversification},
  author={U. Zion and I. Erev and E. Haruvy and T. Shavit},
  journal={Journal of Economic Psychology},
  year={2010},
  volume={31},
  pages={985-995}
}
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… Expand
21 Citations

Figures from this paper

Fooled by Randomness: Investor Perception of Fund Manager Skill
  • 12
  • PDF
Learning and the Economics of Small Decisions
  • 114
  • PDF
Behavioral finance: insights from experiments I: theory and financial markets
  • 27
  • PDF
Toward a general theoretical framework for judgment and decision-making
  • 4
  • PDF
...
1
2
3
...

References

SHOWING 1-10 OF 43 REFERENCES
Model Misspecification and Under-Diversification
  • 401
  • PDF
Risk Taking by Mutual Funds as a Response to Incentives
  • 534
  • PDF
The Diversification Puzzle
  • 163
Household Portfolio Diversification: A Case for Rank-Dependent Preferences
  • 365
How Many Stocks Make a Diversified Portfolio
  • 407
Reinforcement Learning and Savings Behavior
  • 247
  • PDF
Do Investors Trade Too Much
  • 1,962
  • PDF
How Risky Do I Invest: The Role of Risk Attitudes, Risk Perceptions, and Overconfidence
  • 169
  • PDF
...
1
2
3
4
5
...