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Covariation neglect among novice investors.

Conference paper
Authors Tommy Gärling
Martin Hedesström
Henrik Svedsäter
Published in In T. Tyszka (Convener), Behavioral finance. Symposium conducted at the 26th International Congress of Applied Psychology (ICAP) (Athens, Greece).
Publication year 2006
Published at Department of Psychology
Centre for Consumer Science
Language en
Keywords Behavioral finance, financial decision making, risk diversification
Subject categories Psychology

Abstract

Behavioral studies of portfolio diversification typically examine how people divide invest-ments between risky and riskless assets. Effective diversification also requires that the returns of the risky assets in portfolios do not co-vary excessively. In 3 experiments undergraduates made hypothetical investment choices. In Experiment 1 participants paid more attention to the volatility of individual stock funds than to the volatility of the aggregated portfolio. In Ex-periment 2 most participants diversified even when the risk increased due to co-variation be-tween individual fund returns. Experiment 3 identified three reasons for co-variation neglect: (1) Not intending to minimize risk; (2) Failing to understand the effect of co-variation; and (3) Failing to assess volatility of portfolios.

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