Dollar Cost Averaging - The Role of Cognitive Error

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

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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.

Item Type: Report
Uncontrolled Keywords: Investment and Risk Management, Asset Management, Dollar cost averaging, Error, Investment, Mean Variance, Research Papers
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/6227

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