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Portfolio diversification: an experimental study

Author

Listed:
  • Zulia Gubaydullina

    (University of Göttingen)

  • Markus Spiwoks

    (Wolfsburg University of Applied Sciences)

Abstract

The paper analyses on an experimental basis the phenomenon of non-optimal under-diversification in portfolio choice decisions and investigates the reasons behind it. The most important obstacles for optimal diversification are studied – the correlation neglect hypothesis and the overconfidence which both lead to suboptimal diversification decisions. The investment alternatives are constructed in a way that the Markowitz’ efficiency frontier is reduced to a single point in the return-risk diagram so that unambiguous interpretation of the results is possible: the subjects neglect the correlation between the assets, use naïve diversification strategies and take irrelevant information as a foundation for their investment decisions, the first effect being stronger than the second.

Suggested Citation

  • Zulia Gubaydullina & Markus Spiwoks, 2009. "Portfolio diversification: an experimental study," Departmental Discussion Papers 140, University of Goettingen, Department of Economics.
    • Handle: RePEc:got:vwldps:140
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    File URL: http://www2.vwl.wiso.uni-goettingen.de/departmentpaper/No_140.pdf
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    Citations

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    Cited by:

    1. Castro, Luciano de & Galvao, Antonio F. & Kim, Jeong Yeol & Montes-Rojas, Gabriel & Olmo, Jose, 2022. "Experiments on portfolio selection: A comparison between quantile preferences and expected utility decision models," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 97(C).
    2. Zhou, Zhongbao & Jin, Qianying & Xiao, Helu & Wu, Qian & Liu, Wenbin, 2018. "Estimation of cardinality constrained portfolio efficiency via segmented DEA," Omega, Elsevier, vol. 76(C), pages 28-37.
    3. Michael Ungeheuer & Martin Weber, 2021. "The Perception of Dependence, Investment Decisions, and Stock Prices," Journal of Finance, American Finance Association, vol. 76(2), pages 797-844, April.
    4. Weber, Martin & Ungeheuer, Michael, 2016. "The Perception of Dependence and Investment Decisions," CEPR Discussion Papers 11188, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    experimental economics; portfolio choice; investment decisions; correlation neglect; overconfidence;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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