City Research Online

Dollar Cost Averaging - The Role of Cognitive Error

Hayley, S. (2010). Dollar Cost Averaging - The Role of Cognitive Error. .

Abstract

Dollar Cost Averaging (DCA) has been shown to be mean-variance inefficient, yet it remains a very popular strategy. Recent research has attempted to explain its popularity by assuming more complex risk preferences. This paper rejects such explanations by demonstrating that DCA is sub-optimal regardless of preferences over terminal wealth. Instead, this paper identifies the cognitive error in the argument that is normally put forward in favor of the strategy. This gives us a simpler explanation for DCA’s continued popularity: That investors are making a mistake (a misleading comparison) when assessing the benefits of DCA. Unlike previous explanations, this suggests that using DCA may be detrimental to investors.

Publication Type: Report
Publisher Keywords: Investment and Risk Management, Asset Management, Dollar cost averaging, Error, Investment, Mean Variance, Research Papers
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
[thumbnail of Dollar Cost Averaging 28012015.pdf]
Preview
PDF - Submitted Version
Download (177kB) | Preview

Export

Add to AnyAdd to TwitterAdd to FacebookAdd to LinkedinAdd to PinterestAdd to Email

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login