What does high-risk illusion and low resistance to good projects imply? #behavioralfinance
The #NarrowFraming suggests that discussing investment decisions in isolation highlights the neglect of nonrational risks (Narrow Framing – Benartzi and Thaler, 1995; Barberis, Huang and Santos 2001)*.
As a result, a large part of the investment community fails to appreciate the benefits of diversification in reducing portfolio risk and instead discusses each individual investment in isolation. This, in turn, accentuates the incorporation of specific risks into the Equity Risk Premium, leading ultimately to an overestimation of high-risk illusions…
*Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2013 Edition Updated: March 2013; Aswath Damodaran; Stern School of Business