Why do we prefer to spread limited resources across our options?
Naive Allocation
, explained.What is Naive Allocation?
Naive allocation, otherwise known as naive diversification, or the diversification bias, refers to our tendency to equally divide our resources among the options available to us, regardless of whether the options themselves can be considered equal.
Where this bias occurs
The concept of naive allocation is particularly relevant when it comes to investments. In this case, people tend to invest equivalent sums of money in various investment options. Importantly, this decision is made based on instinct, rather than through the use of mathematical models. Arguments exist both for and against this strategy, but one important point put forth by Shlomo Benartzi calls us to err on the side of caution when making investment decisions. He points out that, because our reliance on naive allocation can be influenced by the way certain options are presented to us, we may be heavily influenced by the possibilities offered to us by a stockbroker.1
