A BEHAVIORAL FRAMEWORK FOR DOLLAR-COST AVERAGING

Dollar-cost averaging from cash into stocks involves dividing a cash amount into segments and converting these segments into stocks one at a time over a predetermined period, The practice of dollar-cost averaging is suboptimal according to the framework of standard finance, but the practice is persistent and widespread. The author argues that dollar-cost averaging is consistent with the positive theory of behavioral finance. In this respect, dollar-cost averaging is a phenomenon like the preference for dividends, the reluctance to realize losses, and the belief that stocks of high-quality companies offer high expected returns.