The perceived diversity heuristic: the case of pseudodiversity

One of the normative ways to decrease the risk of a pool with uncertainty prospects is to diversify its resources. Thus, decision makers are advised not to put all their eggs in one basket. The authors suggest that decision makers use a perceived diversity heuristic (PDH) to evaluate the risk of a pool by intuitively assessing the diversity of its sources. This heuristic yields biased judgments in cases of pseudodiversity, in which the perceived diversity of a pool is enhanced, although this fact does not change the pool's normative values. The first 3 studies introduce 2 independent sources of pseudodiversity-distinctiveness and multiplicity-showing that these two sources can lead to overdiversification under conditions of gain. In another set of 3 studies, the authors examine the effect of framing on diversification level. The results support the PDH predictions, according to which diversity seeking is obtained under conditions of gain, whereas diversity aversion is obtained under conditions of loss.