We study individual portfolio choice in a laboratory experiment and find
strong evidence for heuristic behavior. The subjects tend to focus on the
marginal distribution of an asset, while largely ignoring its diversification
benefits. They follow a conditional 1/n diversification heuristic as they
exclude the assets with an “unattractive” marginal distribution and divide
the available funds equally between the remaining, “attractive” assets.
This strategy is applied even if it leads to allocations that are dominated in
terms of first-order stochastic dominance and is clearly irrational. In line
with these findings, we find that framing and problem presentation have
substantial influence on portfolio decisions