22. Diversification and Asset Allocation Puzzles

  1. H. Kent Baker and
  2. Victor Ricciardi
  1. Dimitris Georgarakos

Published Online: 1 MAR 2014

DOI: 10.1002/9781118813454.ch22

Investor Behavior: The Psychology of Financial Planning and Investing

Investor Behavior: The Psychology of Financial Planning and Investing

How to Cite

Georgarakos, D. (2014) Diversification and Asset Allocation Puzzles, in Investor Behavior: The Psychology of Financial Planning and Investing (eds H. K. Baker and V. Ricciardi), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118813454.ch22

Author Information

  1. Assistant Professor, Goethe University Frankfurt, Senior Economist, DG-Research, European Central Bank, Research Fellow, Center for Financial Studies

Publication History

  1. Published Online: 1 MAR 2014
  2. Published Print: 31 JAN 2014

ISBN Information

Print ISBN: 9781118492987

Online ISBN: 9781118813454



  • household finance;
  • inertia;
  • portfolio diversification;
  • stock market participation;
  • trading frequency


Asset allocation and portfolio diversification decisions have important welfare and policy implications. This chapter reviews studies that examine three key aspects of financial investing: participation in stock markets, portfolio diversification, and trading behavior. Standard finance theory makes predictions about the optimal investment behavior of rational agents with reference to each of these three aspects. On the other hand, empirical studies document that observed behavior of investors largely deviates from theory predictions. The chapter also provides a discussion of empirical regularities that point to these deviations such as the limited stock market participation, the poor diversification and preference for domestic securities, and the contrast between excess trading activity of a few wealthy investors and considerable trading inertia exhibited by the majority of the population. These issues become increasingly topical as investors face a richer menu of complex financial instruments and gradually assume higher responsibility for retirement financing.