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dc.contributor.authorReinholtz, Nicholas
dc.contributor.authorFernbach, Philip M.
dc.contributor.authorde Langhe, Bart
dc.date.accessioned2022-10-28T03:20:10Z
dc.date.available2022-10-28T03:20:10Z
dc.date.issued2021en_US
dc.identifier.issn0025-1909
dc.identifier.doi10.1287/mnsc.2020.3893
dc.identifier.urihttp://hdl.handle.net/20.500.12127/7136
dc.description.abstractDiversification—investing in imperfectly correlated assets—reduces volatility without sacrificing expected returns. Although the expected return of a diversified portfolio is the weighted average return of its constituent parts, the variance of the portfolio is less than the weighted average variance of its constituent parts. Our results suggest that very few people have correct statistical intuitions about the effects of diversification. The average person in our data sees no benefit of diversification in terms of reducing portfolio volatility. Many people, especially those low in financial literacy, believe diversification actually increases the volatility of a portfolio. These people seem to believe that the unpredictability of individual assets compounds when aggregated together. Additionally, most people believe diversification increases the expected return of a portfolio. Many of these people correctly link diversification with the concept of risk reduction but seem to understand risk reduction to mean greater returns on average. We show that these beliefs can lead people to construct investment portfolios that mismatch investors’ risk preferences. Furthermore, these beliefs may help explain why many investors are underdiversified.en_US
dc.language.isoenen_US
dc.publisherINFORMSen_US
dc.subjectDiversificationen_US
dc.titleDo people understand the benefit of diversification?en_US
dc.identifier.journalManagement Scienceen_US
dc.source.volume67en_US
dc.source.issue12en_US
dc.source.beginpage7322en_US
dc.source.endpage7343en_US
dc.identifier.eissn1526-5501
vlerick.knowledgedomainMarketing & Salesen_US
vlerick.typearticleFT ranked journal article  en_US
vlerick.vlerickdepartmentMKTen_US
dc.identifier.vperid300832en_US


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