Dollar cost averaging - the role of cognitive error

Dollar Cost Averaging (DCA) has long been shown to be mean-variance inefficient, yet it remains a very popular investment strategy. Recent research has attempted to explain this popularity by assuming more complex investor risk preferences.

However, this paper demonstrates that DCA is sub-optimal regardless of investor preferences over terminal wealth. Instead this paper offers a simpler explanation: That DCA's continued popularity is due to a specific and demonstrable cognitive error in the argument that is normally put forward in favor of the strategy.

Demonstrating this error should help investors make better-informed decisions about whether to use DCA.

The full paper is now available for you to download below, let us know what you think in the comments box.

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