Naive Buying Diversification and Narrow Framing by Individual Investors

We provide the first tests to distinguish whether individual investors equally balance their overall portfolios (naive portfolio diversification, NPD) or, in contrast, equally balance the values of same-day purchases of multiple assets (naive buying diversification, NBD). We find NBD in purchases of multiple stocks, and in mixed purchases of individual stocks and funds. In contrast, there is little evidence of NPD. Evidence suggests that NBD arises due to stock picking behavior and neglect of diversification. These findings suggest that behavioral finance theory should incorporate transaction, as well as portfolio, framing.