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Portfolio diversification: the influence of herding, status-quo bias, and the gambler’s fallacy

Author

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  • Ibrahim Filiz

    () (Ostfalia University of Applied Sciences)

  • Thomas Nahmer

    () (Georg August University Göttingen)

  • Markus Spiwoks

    () (Ostfalia University of Applied Sciences)

  • Kilian Bizer

    () (Georg August University Göttingen)

Abstract

Abstract This experimental study examines the influence of herding [following the majority of fellow gamblers or the most successful gambler (guru)], status-quo bias, and the gambler’s fallacy on diversification behavior. We find that neither herding nor status-quo bias contributes significantly to non-optimal portfolio choices. The gambler’s fallacy, however, plays an important role in these decisions. Many subjects appear to find patterns in a history of random events and then use these “patterns” to infer the sequence of future events. The gambler’s fallacy is significantly responsible for the fact that the optimal structure of a portfolio is considered in only 37.7% of all choices made by an investor.

Suggested Citation

  • Ibrahim Filiz & Thomas Nahmer & Markus Spiwoks & Kilian Bizer, 2018. "Portfolio diversification: the influence of herding, status-quo bias, and the gambler’s fallacy," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 32(2), pages 167-205, May.
  • Handle: RePEc:kap:fmktpm:v:32:y:2018:i:2:d:10.1007_s11408-018-0311-x
    DOI: 10.1007/s11408-018-0311-x
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    Keywords

    Behavioral finance; Experiments; Portfolio choice; Non-optimal diversification; Herding; Guru; Status-quo bias; Gambler’s fallacy;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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