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Naive Diversification Strategies in Defined Contribution Saving Plans

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  • Richard H. Thaler
  • Shlomo Benartzi

Abstract

There is a worldwide trend toward defined contribution saving plans and growing interest in privatized Social Security plans. In both environments, individuals are given some responsibility to make their own asset-allocation decisions, raising concerns about how well they do at this task. This paper investigates one aspect of the task, namely diversification. We show that some investors follow the "1/n strategy": they divide their contributions evenly across the funds offered in the plan. Consistent with this naive notion of diversification, we find that the proportion invested in stocks depends strongly on the proportion of stock funds in the plan.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.91.1.79
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 1 (March)
Pages: 79-98

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:1:p:79-98

Note: DOI: 10.1257/aer.91.1.79
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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  3. Salvador Valdés & Peter Diamond, . "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
  4. Mitchell, Olivia S & Zeldes, Stephen P, 1996. "Social Security Privatization: A Structure for Analysis," American Economic Review, American Economic Association, vol. 86(2), pages 363-67, May.
  5. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
  6. Canner, Niko & Mankiw, N Gregory & Weil, David N, 1997. "An Asset Allocation Puzzle," American Economic Review, American Economic Association, vol. 87(1), pages 181-91, March.
  7. Loomes, Graham, 1991. " Evidence of a New Violation of the Independence Axiom," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 91-108, January.
  8. Douglas D. Bernheim, . "Financial Illiteracy, Education, and Retirement Saving," Pension Research Council Working Papers 96-7, Wharton School Pension Research Council, University of Pennsylvania.
  9. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  10. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, vol. 30(2), pages 585-603, May.
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