Naive Allocation

Naive allocation, also known as naive diversification or the diversification bias, is a tendency to equally divide resources among available options regardless of their relative valueThis type of allocation is influenced by the way in which the options are presented, known as “partitioning of options” Naive allocation was first described by Itamar Simonson in a marketing contex, and later studied in finance by Shlomo Benartzi and Richard H. Thaler in 2001The most common example of naive allocation is the 1/N heuristic portfolio, where an investor divides their resources equally among all available asset classes. This strategy has been observed in defined contribution plans such as 401(k)s, and has been found to stand up to academic analysis. However, it may not be appropriate for all situations and other kinds of allocation schemes may be more suitable depending on the information available

If a business uses naive allocation to allocate resources among different projects, it may not be effectively prioritizing the most important or impactful projects. This can lead to wasted resources and missed opportunities to deliver value to customers or stakeholders. By dividing resources equally among projects, a business may not have the ability to respond to changes or pivot in response to new opportunities or challenges.

Lastly, naive allocation may not take into account the specific needs and goals of individual projects, which can lead to an imbalance in the allocation of resources. For example, if a project requires a large amount of resources upfront to get started, but the resources are not available, the project may be delayed or face other challenges.

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