Portfolio Allocation using RMA

A recent paper in the #JournalofFinance investigates how investors approach their portfolio allocation. The authors find evidence for an investor heuristic called naive buying diversification (NBD), where investors allocate 1/N of their money in the N assets bought on that day (instead of considering their portfolio composition as a whole). The authors used our MarketPsych Analytics ("TRMI" in the paper) to test an explanatory hypothesis for such behavior. Their analysis provides support for a stock-picking explanation: NBD is more common when investors buy similar stocks, such as stocks with similar buzz (amount of media chatter). The findings could "have implications for the design of contribution-based saving plans, such as pension schemes". https://lnkd.in/da7m7BSd

The researchers combined datasets of #Barclays brokerage transactions (and demographic data), LSEG (London Stock Exchange Group) price data, and #MarketPsych news data.

The below plot shows the function by which investors are more biased to invest in the similar buzz stocks. Lower buzz difference between two stocks (one proxy for similarity) is correlated with higher likelihood of them being purchased using the NBD pattern.