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Under-Diversification And The Role Of Best Reply To Pattern

  • 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)



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

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.

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Paper provided by Ben-Gurion University of the Negev, Department of Economics in its series Working Papers with number 0707.

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Length: 32 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bgu:wpaper:0707
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