IDEAS home Printed from https://ideas.repec.org/a/spt/fininv/v4y2015i2f4_2_1.html
   My bibliography  Save this article

Correlation Neglect, Naïve Diversification, and Irrelevant Information as Stumbling Blocks for Optimal Diversification

Author

Listed:
  • Zulia Gubaydullina
  • Markus Spiwoks

Abstract

The paper analyses on an experimental basis the phenomenon of non-optimal diversification in portfolio choice decisions. The main obstacles to achieving optimal diversification are investigated – the correlation neglect hypothesis and information processing, both of which lead to suboptimal diversification decisions. This is possible by constructing the investment alternatives in the experimental design in such a way that the Markowitz efficient frontier is reduced to a single point in the return-risk diagram, enabling unambiguous interpretation of the results. The experiment shows that the subjects are not in a position to use the information that is most relevant to investment alternatives and ignore correlation in making their portfolio choice. Moreover, they are unable to prescind from clearly irrelevant information. The first effect dominates the second – in the absence of irrelevant information, the subjects neglect the correlation between the assets. The effect is even more pronounced with additional irrelevant information. These findings shed more light on individual investment behaviour and pose questions about regulating pension funds to ensure optimal diversification of pension savings.

Suggested Citation

  • Zulia Gubaydullina & Markus Spiwoks, 2015. "Correlation Neglect, Naïve Diversification, and Irrelevant Information as Stumbling Blocks for Optimal Diversification," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 4(2), pages 1-1.
    • Handle: RePEc:spt:fininv:v:4:y:2015:i:2:f:4_2_1
    as

    Download full text from publisher

    File URL: http://www.scienpress.com/Upload/JFIA%2fVol%204_2_1.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ibrahim Filiz & Jan René Judek & Marco Lorenz & Markus Spiwoks, 2022. "Algorithm Aversion as an Obstacle in the Establishment of Robo Advisors," JRFM, MDPI, vol. 15(8), pages 1-25, August.
    2. Markus Spiwoks & Kilian Bizer, 2018. "Correlation Neglect and Overconfidence. An Experimental Study," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(3), pages 1-5.
    3. Cornil, Yann & Hardisty, David J. & Bart, Yakov, 2019. "Easy, breezy, risky: Lay investors fail to diversify because correlated assets feel more fluent and less risky," Organizational Behavior and Human Decision Processes, Elsevier, vol. 153(C), pages 103-117.
    4. 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.
    5. Filiz, Ibrahim & Nahmer, Thomas & Spiwoks, Markus & Gubaydullina, Zulia, 2020. "Measurement of risk preference," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    6. Sesil Lim & Bas Donkers & Patrick Dijl & Benedict G. C. Dellaert, 2021. "Digital customization of consumer investments in multiple funds: virtual integration improves risk–return decisions," Journal of the Academy of Marketing Science, Springer, vol. 49(4), pages 723-742, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spt:fininv:v:4:y:2015:i:2:f:4_2_1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Eleftherios Spyromitros-Xioufis (email available below). General contact details of provider: http://www.scienpress.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.