Using unique survey data from the China Household Finance Survey, we estimate the extent of “narrow framing”, which is a widely documented behavioral bias, among Chinese households, using their portfolio choices. Conditional on stock market participation, we find that most Chinese households exhibit significant narrow framing. Based on the obtained estimates, we show that narrow framing positively predicts the extent of under diversification. Most importantly, we argue that narrow framing is an irreplaceable of understanding households’ portfolio choices, even after considering measurement error and a wide set of indicators of diversification

Based on detailed trade records of individual investors who participated in both China’s A- and B- share markets, we find investors are more likely to buy A (B) shares when the A-share premium is lower (higher), when they have already held the same firm’s A (B) shares and when they have previously traded the same firm’s A (B) shares. Given that the correlation between the same firm’s A and B shares is below 70% and that A shares are more expensive, it is sensible for investors to invest more into the B shares. Our evidence suggests that investors accept a less than optimal portfolio due to lack of investment experience.