In a recent MSOM article by WiSo professors Thonemann and Fügener, as well as Professor Schiffels from the University of Augsburg, the researchers develop a behavioural model based on naive diversification, in which managers split budgets evenly both between buckets and within the project types in each bucket. The model predicts how threshold placement and bucket count steer investment shares and the portfolio’s risk–return profile. The authors test these predictions in lab experiments with human decision makers under multiple bucket designs. They document pervasive naïve diversification: participants even-split across categories and within each, pulling portfolios away from efficiency. The effect of bucket-design choices is considerable, even exceeding effects of risk preferences on resulting portfolio risk profiles.
The most important findings in brief: Managers exhibit naïve diversification: they even-split across labeled categories, not because it’s optimal, but because of an inherent need to balance. This bias appears between buckets (e.g., safer vs. riskier) and within buckets (across project types inside a bucket), systematically pulling portfolios off the efficient choice.
Managerial take-aways include: Strategic buckets don’t just organize choices—they nudge them. Labels and thresholds guide attention, letting managers predictably shift portfolio risk and return. By tuning thresholds and granularity (how finely you partition types), firms can, for example, increase or decrease the share of risky but innovative projects. In short: strategic buckets don’t just structure the portfolio—they shape it.
The researchers' article was selected as ‘Paper of the Month’ by INFORMS TIMES. The award highlights how relevant the study is for understanding and shaping strategic portfolio decisions.
