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Under-Diversification And The Role Of Best Reply To Pattern

Author

Listed:
  • Uri Ben-Zion

    (Dept. of Economics, Ben-Gurion University of the Negev, Israel)

  • Ido Erev

    (Faculty of Industrial Engineering and Management, Technion, Israel)

  • Ernan Haruvy

    (Corresponding author: School of Management, University of Texas at Dallas)

  • TAL SHAVIT

    (School of Management, College of Management, Rishon LeZion, Israel)

Abstract

Three experiments are presented that compare alternative explanations to the coexistence of risk aversion and under-diversification in investment decisions. The participants were asked to select one of several assets under two feedback conditions. In each case, one asset was a weighted combination of the other assets, allowing for lower volatility. The frequency of choice of the composite asset was highly sensitive to feedback condition. The composite asset was the least popular asset when the feedback included information concerning forgone payoffs, and increased in frequency when the feedback was limited to the obtained payoff. These results support the assertion that under-diversification can be a product of learning from feedback and in particular best reply to pattern.

Suggested Citation

  • Uri Ben-Zion & Ido Erev & Ernan Haruvy & TAL SHAVIT, 2007. "Under-Diversification And The Role Of Best Reply To Pattern," Working Papers 0707, Ben-Gurion University of the Negev, Department of Economics.
    • Handle: RePEc:bgu:wpaper:0707
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Risk; Diversification; Learning;
    All these keywords.

    JEL classification:

    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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