The psychologyComparing each option’s real risk, return, and overlap takes effort most people skip in the moment. The mind substitutes an easier question: how many options are there, and what is one divided by that? An even split then feels like sensible diversification without checking what sits inside each option, or how alike the options are.
That is why the rule is called naive diversification: it diversifies by count, not by content. Two menus holding the same underlying assets, one drawn as three funds and one as six, get split three ways or six ways under this rule. That produces two different final portfolios from the same building blocks, purely because of how many boxes the menu drew around them.
Where it causes errorsCommSec Pocket’s “Invest in” menu lists ten flat options side by side: Aussie Top 200, Aussie Dividends, Aussie Sustainability, Aussie Corporate Bonds, Global 100, Diversified Equities, Emerging Markets, Health Wise, Sustainability Leaders, and Tech Savvy. There is no default and no guidance on how much to put in each.
A first-time investor chasing “a spread” who taps four or five of them is likely to split evenly across whichever ones they happened to pick. They miss that Diversified Equities already holds hundreds of companies across several markets, while Tech Savvy, Health Wise, and Emerging Markets are concentrated, higher-volatility single-theme bets. They also miss that Aussie Top 200 and Aussie Dividends likely already share many of the same large ASX names.
Benartzi and Thaler found the same pattern in real employer retirement plans. The share of contributions held in stock funds tracked the share of stock funds among the funds the plan listed. A plan that listed mostly stock funds produced mostly-stock employee portfolios. A plan that listed mostly bond funds produced bond-heavy ones, almost independent of what employees said about their own risk tolerance.
Where it can helpOnce it is clear that people will roughly divide evenly across whatever is offered, the menu itself becomes a design lever. A plan sponsor or app designer can offer a smaller, genuinely balanced set, or lead with one already-diversified default. That can produce a sensible outcome from someone who would otherwise equal-weight a messier list. Menu composition is a consequential design choice. Length for its own sake is not a neutral virtue.
Spotted in the wild
CommSec Pocket's real “Invest in” screen: ten flat options, no default, no grouping, and nothing telling a new investor how much of their money should go where.
CommSec Pocket, “Invest in” menu. Ten options, equal visual weight, no indication of how they overlap or how concentrated each one is. Captured 2026-08-28.
This screenshot shows a real, current menu, not a claim that any particular investor actually equal-weighted it. The evidence that people tend to do exactly that with menus shaped like this is the cited study below.
The paper that named the “1/n” naive-diversification strategy in retirement saving.
StrengthReal employer retirement-plan data show revealed behaviour with money on the line, and a companion menu experiment varies how many funds appear and of what type. The 1/n pattern surfaces under both real stakes and clean experimental control.
WeaknessIn the field data, employers that list more stock funds also tend to hold more stock. Those employers may also differ in workforce demographics or risk philosophy in ways that push holdings up on their own. The companion experiment speaks to that worry without fully settling it for the observational half.
Key findings
Verbatim (abstract)“We show that some investors follow the ‘1/n strategy’: they divide their contributions evenly across the funds offered in the plan.”
Verbatim (abstract)“Consistent with this naive notion of diversification, we find that the proportion invested in stocks depends strongly on the proportion of stock funds in the plan.”
ParaphrasedIn a companion hypothetical-menu experiment, University of California employees offered a choice among four fixed-income funds and one stock fund allocated an average of 43% of their contributions to equities, while a separate group offered one fixed-income fund and four stock funds, the same mix TWA's pilot plan actually uses, allocated 68%, a 25-point gap the authors found statistically significant even though a rational, mean-variance-optimizing investor would only have moved a few points.
Run this one live: Live Sessions: Diversification Heuristic, a real room tapping funds from CommSec Pocket's own flat 10-option menu versus a curated 3-option one, instead of the CommSec analogy alone.
Social Proof
Why does a restaurant with a line outside feel safer to pick?
Under uncertainty, people treat what everyone else appears to be doing as a signal of quality. Popularity itself becomes the evidence.
The psychology. Ambiguity pushes people to treat others' visible behaviour as information. The shortcut is often sound: if 500 people chose this, it is probably fine. It fails when the crowd's choice was shaped by something other than quality, such as which option simply got noticed first.
Ambiguity pushes people to treat others' visible behaviour as information. The shortcut is often sound: if 500 people chose this, it is probably fine. It fails when the crowd's choice was shaped by something other than quality, such as which option simply got noticed first.
A product, app, or song can grow more popular because it was displayed as popular early, even when a better alternative sat nearby. Visible popularity then draws still more followers, compounding regardless of the real quality gap.
Real, verified figures (checked reviews, actual completion rates) help people decide faster under genuine uncertainty. The test is whether the number is representative of real behaviour, or built to manufacture a herd.
Two examples from the same real checkout flow, a domain registrar upselling an add-on, then asking for payment on the very next screen. Both lean on the identical mechanism this principle names: let a crowd's size stand in for a quality judgment the buyer hasn't made themselves.
GoDaddy, domain checkout upsell. “CHOSEN BY OVER 225,000 CUSTOMERS EACH MONTH” sits directly under a $13.95/yr add-on marked “RECOMMENDED,” right where a buyer is deciding whether to add it. Captured 2026-08-26.
Same checkout, order summary screen. A 4.4-star Trustpilot rating and “139,923 reviews” count appear directly above the “Complete Purchase” button, the last thing shown before payment. Captured 2026-08-26.
Both numbers are GoDaddy's own claims, not independently verified figures, the same honesty check this site applies to every citation. Showing them here demonstrates the tactic in current, active use, not that it worked on these particular screens. The actual evidence that the mechanism is real is the cited study below.