Individual Decision Making and Investor Welfare

Abstract

This article analyses and quantifies the costs of suboptimal decision making for an investor with a multi‐period horizon. In light of the empirical evidence that investors are too conservative and hold portfolios that are insufficiently diversified, we evaluate the costs of suboptimal equity participation both analytically and using simulation, and also estimate the costs of suboptimal diversification using simulation. We find that suboptimal leverage imposes only modest costs on the investor for reasonable parameter values. While the costs of inadequate diversification can be very high, we find that, because of the higher returns on small firms, an equally weighted portfolio of as few as five randomly chosen firms can provide the same level of expected utility as the value weighted market portfolio. (J.E.L.: G11, G18, G23).

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 103 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.