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Naïve diversification in the Swedish premium pension scheme: Experimental evidence

Journal article
Authors Martin Hedesström
Henrik Svedsäter
Tommy Gärling
Published in Applied Psychology: An International Review
Volume 58
Issue 3
Pages 403-417
Publication year 2009
Published at Department of Psychology
Centre for Consumer Science
Pages 403-417
Language en
Keywords Diversification, covariation neglect, pension savings
Subject categories Psychology

Abstract

In the Swedish Premium Pension Scheme (PPS) all citizens in paid employment allocate part of their public pension savings to mutual funds. In so doing they tend to distribute their choices maximally across different stock fund categories. It is hypothesised that this reflects the naïve application of a variety-inducing diversification heuristic. The results of two experiments simulating choices of fund categories in the PPS support this hypothesis by showing that participating undergraduates chose stock funds investing in overlapping and non-overlapping markets or industries in a way demonstrating failure to take into account covariation among fund returns. Administrators of the PPS and similar defined-contribution pension plans should provide participants with comprehensive advice on how to diversify their investment.

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