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Many employees believe that their employer’s stock is less likely to lose half of its value...

Many employees believe that their employer’s stock is less likely to lose half of its value than a well-diversified portfolio of stocks. Explain why this belief is erroneous.

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Answer #1

Many employees believe that their employer’s stock is less likely to lose half of its value than a well-diversified portfolio of stocks. This belief is erroneous because of the cognitive biasin their thinking. Many employees believe that they have some sort of controlover the company and end up owing a significant portion of the company's stock in their portfolio. This leads to under-diversification.

Familiarity bias is another reason why many employees believe that their company stock performs well.

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