Heather has the equivalent of one year's income in an insured savings account. Her 401-K fund offers a choice of a government bond fund, an S&P 500 Index fund, and a balanced fund that holds roughly equal amounts of stocks and bonds. If she decided to allocate 1/3 of her retirement investments to each fund, she may be a victim of
A) overconfidence.
B) narrow framing.
C) loss aversion.
D) representativeness.

Question

Quizplus · Accepted Answer

Narrow framing refers to the mistake of viewing each investment in isolation rather than as part of a whole portfolio. By allocating her retirement investments equally among the three funds without considering how they interact with her overall financial situation, including her savings, Heather may not be diversifying her investments as effectively as she thinks, which is a form of narrow framing.

Heather Has the Equivalent of One Year's Income in an Insured