How Elementary is Diversification? A Study of Children's Portfolio Choice

Diversification is a fundamental concept in economics, decision theory, and finance. This paper asks how elementary the notion of diversification is by studying whether children apply it as a choice heuristic. We find that... [ view full abstract ]

Diversification is a fundamental concept in economics, decision theory, and finance. This paper asks how elementary the notion of diversification is by studying whether children apply it as a choice heuristic. We find that children do exhibit preferences for diversification, both for the sake of variety across consumption goods and for the purpose of mitigating risk when faced with a choice across risky gambles. Our results indicate that diversification preferences may have fundamental, developmental roots, which contrasts with the traditional normative view of diversification, in which most economic models take diversification preferences as exogenously given.