Naïve Allocation

What is naïve allocation?

Naïve allocation, or naïve diversification, means using a simple rule such as splitting resources equally across the options offered. An equal split across n options is often written as the 1/n rule: each option receives one nth of the total. The allocation can then depend on how the menu is divided, rather than only on the underlying assets or the person’s aims.

Benartzi and Thaler (2001) found evidence that some retirement-plan participants used simple diversification strategies and that the mix of funds offered could affect the mix of assets chosen. They did not establish that every investor divides money exactly equally.

How the menu changes the allocation

• Suppose a hypothetical plan offers three funds invested entirely in stocks and one invested entirely in bonds. Splitting contributions equally gives each fund 25%, for a combined allocation of 75% stocks and 25% bonds.
• Reverse the menu to one stock fund and three bond funds, and the same rule produces 25% stocks and 75% bonds.

The person used the same rule, but the menu changed the underlying exposure. These figures are arithmetic illustrations, not study averages or recommended investment allocations.

The grouping of options can matter, too. Fox, Ratner, and Lieb (2005) found allocation patterns that depended on how options were partitioned. A menu does more than list choices; it can also define the categories that people divide across.

Is an equal split always a mistake?

No. An equal split can be reasonable. To examine one, look past the labels and count what each option contains, how the options overlap, and what the combined allocation is meant to achieve.