What Is The Diversification Bias In Behavioral Economics?

The diversification bias is a phenomenon in behavioral economics in which people have a tendency to diversify their investments or choices too much, even when doing so is not in their best interest. For example, people may spread their investments across a large number of different stocks, even if some of those stocks are not likely to perform well. This can lead to suboptimal outcomes, as people may miss out on the potential benefits of focusing on a smaller number of high-quality investments. To avoid the diversification bias, it is important to carefully evaluate the potential risks and rewards of each investment or choice, and to diversify only to the extent that it is likely to be beneficial.

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