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.