Abstract
This paper assesses the level of sophistication evident in investment choices of a large sample of individuals drawn from three Australian retirement savings funds. Available US and UK evidence is somewhat mixed on both the measures that should be used when measuring the sophistication as well as its prevalence. This paper investigates naive diversification heuristics using Australian member level investment choice data over a six year period, 2001 to 2006. Results suggest a strong preference for using a small number of options in investment choices. There is little evidence to support the 'pure' 1/n heuristic (Benartzi and Thaler, 2001). However when multiple options are selected, one-third are classified as conditional 1/n (Huberman and Jiang, 2006). The proportion of choices classified as conditional 1/n is strongly related to the number of options used in the choice. The possible consequence of menu framing on asset class allocation is investigated and does not support an influence of menu on effective allocations, at least in terms of equity exposure.
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