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How Elementary is Diversification? A Study of Children’s Portfolio Choice


De Giorgi, Enrico; Mahmoud, Ola (2017). How Elementary is Diversification? A Study of Children’s Portfolio Choice. SSRN 3018421, University of Zurich.

Abstract

Diversification is a fundamental concept in economics, decision theory, and finance, but the way in which it is implemented in the real world varies greatly. This paper asks how elementary the notion of diversification is by studying whether children apply it as a choice heuristic. We report on results of an experiment that tests whether children diversify in a sequence of hypothetical choice questions and dice-rolling games. Overall, we find that children do exhibit preferences for diversification, both for the sake of variety across consumption goods and for the purpose of mitigating risk when faced with a choice across risky gambles. The naive diversification heuristic, which implies an equal allocation across alternatives, is particularly evident in children's choices when the alternatives are equivalent or unknown. We also investigate the relationship between risk aversion and diversification and find no significant connection between the two. Our results indicate that diversification preferences may have fundamental, developmental roots, which contrasts with the traditional normative view of diversification, in which most economic models take diversification preferences as exogenously given. This may have implications for how one can treat investment anomalies in practice and, in particular, promotes financial literacy training from a young age.

Abstract

Diversification is a fundamental concept in economics, decision theory, and finance, but the way in which it is implemented in the real world varies greatly. This paper asks how elementary the notion of diversification is by studying whether children apply it as a choice heuristic. We report on results of an experiment that tests whether children diversify in a sequence of hypothetical choice questions and dice-rolling games. Overall, we find that children do exhibit preferences for diversification, both for the sake of variety across consumption goods and for the purpose of mitigating risk when faced with a choice across risky gambles. The naive diversification heuristic, which implies an equal allocation across alternatives, is particularly evident in children's choices when the alternatives are equivalent or unknown. We also investigate the relationship between risk aversion and diversification and find no significant connection between the two. Our results indicate that diversification preferences may have fundamental, developmental roots, which contrasts with the traditional normative view of diversification, in which most economic models take diversification preferences as exogenously given. This may have implications for how one can treat investment anomalies in practice and, in particular, promotes financial literacy training from a young age.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2017
Deposited On:12 Mar 2019 15:20
Last Modified:25 Sep 2019 00:27
Series Name:SSRN
OA Status:Green
Other Identification Number:merlin-id:17307

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