Tendency for people to favor a portfolio based on the perceived risk rather than the actual risk of the portfolio (based on real variance or probability).
The following item is used:
Imagine five stacks of lottery tickets. Each ticket has the numbers 1 to 49. A computer will randomly select five different numbers from this range. In order to win a monetary prize, you are required to guess the numbers that will come up. To take part in the bet, please select method A or method B below:
(a) Method A: Pick five tickets and mark five numbers on each of them. If you mark at least one of your tickets with the five numbers that are randomly selected in the lottery, you win.
(b) Method B: Pick one lottery ticket and mark six numbers from the entire range. If you mark the five numbers that are randomly selected in the lottery, you win.
Participants who choose the portfolio with higher perceived diversity but lower expected value (Method A) are coded as biased.
Ayal, S., Hochman, G., & Zakay, D. (2011). Two sides of the same coin: Information processing style and reverse biases. Judgment and Decision Making, 6(4), 295–306.