Gathergood, J., Leake, D., Sakaguchi, H., & Stewart, N. (2017). Naïve diversification and narrow framing among individual investors. Available at SSRN:

We show that individual investors buying multiple stocks on the same day often employ the naive diversification 1/N rule for dividing money amounts equally across buy-day purchases. The use of this rule-of-thumb is common across investors by age, gender and timing of the purchase, and only decreases modestly as the financial stakes increase. However, investors appear not be using a 1/N portfolio allocation rule. Focusing on individuals who “top-up” positions in their portfolios by adding to existing stocks, we show that these investors appear to narrowly frame the buy-day allocation decision independently of their existing portfolio. They use a 1/N rule for dividing monies across new purchases on the buy-day, not as a rule for obtaining equal portfolio shares. Hence very few investors maintain a 1/N portfolio allocation. In addition, many investors appear to jointly determine their total buy-day investment and number of stocks so that the 1/N calculation is made simpler, for example buying 2 stocks with spends of £2000 or £4000, but 3 stocks with a spend of £3000.