Narrow framing and under-diversification: Empirical evidence from Chinese households

Abstract

Using unique survey data from the China Household Finance Survey, we estimate the extent of “narrow framing”, which is a widely documented behavioral bias, among Chinese households, using their portfolio choices. Conditional on stock market participation, we find that most Chinese households exhibit significant narrow framing. Based on the obtained estimates, we show that narrow framing positively predicts the extent of under-diversification. Most importantly, we argue that narrow framing is an irreplaceable of understanding households' portfolio choices, even after considering measurement error and a wide set of indicators of diversification.