New NBER Working Papers

This week sees the release of two new research papers by researchers in the School of Economics at the University of Nottingham in the National Bureau of Economic Research (NBER) Working Paper Series.

In Naïve Buying Diversification and Narrow Framing by Individual Investors by the University of Nottingham economist John Gathergood, together with David Hirshleifer, David Leake, Hiroaki Sakaguchi and Neil Stewart, the authors use individual investor data from Barclays Stockbroking to examine diversification choices. The research finds that individual investors buying multiple stocks on the same day often use a naïve diversification 1/N heuristic, dividing purchase value equally across stocks. Yet very few investors maintain a 1/N portfolio allocation. Instead, investors appear to narrowly frame their buy-day decision independently of their portfolio, applying the 1/N heuristic only for new purchases. The use of this heuristic decreases, but does not disappear, as financial stakes and investor trading experience increase. These findings indicate that the simple heuristics individual investors use in practice depart further from rationality than is often assumed even in behavioral models of investment decisions.

In How Do Americans Repay Their Debt? The Balance-Matching Heuristic by NSE economists John Gathergood and Joerg Weber, together with Neale Mahoney and Neil Stewart, the authors use credit file data from Transunion to examine credit card repayments. This research builds on the closely related recent research paper entitled How Do Individuals Repay Their Debt? The Balance-Matching Heuristic, by the same authors, forthcoming in the March 2019 issue of the American Economic Review. In that paper, the authors studied credit card repayments using linked data on multiple cards from the United Kingdom. They showed that individuals did not allocate payments to the higher interest rate card, which would minimize the cost of borrowing, but instead made repayments according to a balance-matching heuristic under which the share of repayments on each card is matched to the share of balances on each card. In the new paper, the authors examine whether these results extend to the United States using a large sample of TransUnion credit bureau data. These data do not provide information on interest rates, so the analysis cannot examine the optimality of payments. However, the data set does include observations of balances and repayments, allowing an examination of balance-matching behavior. The paper replicates the earlier analysis and finds that Americans also repay their debt in accordance with a balance-matching heuristic.

The NBER is the leading non-profit economic research organisation in the United States. The NBER working paper series is distributed each week and is the most cited working paper series in the IDEAS/RePEc ranking.