Chris Dillow 

When irrationality works

Chris Dillow

Chris Dillow
When irrationality works

One oddity of many investors’ portfolios is that they are split quite evenly across assets, equities or funds. In a classic paper in 1999, Shlomo Benartzi and Richard Thaler showed that many pension fund investors divided their money evenly across the funds available to them, something they called naïve diversification. We often see something similar in our readers’ portfolios. This behaviour conflicts with portfolio optimisation, which often recommends a big holding of a few low-volatility assets. And it also conflicts with the core-satellite approach, which calls for a big holding of tracker funds and lighter investments elsewhere.

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