Diversification preferences in the theory of choice
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Abstract: Diversification represents the idea of choosing variety over uniformity. Within the theory of choice, desirability of diversification is axiomatized as preference for a convex combination of choices that are equivalently ranked. This corresponds to the notion of risk aversion when one assumes the von-Neumann-Morgenstern expected utility model, but the equivalence fails to hold in other models. This paper studies axiomatizations of the concept of diversification and their relationship to the related notions of risk aversion and convex preferences within different choice theoretic models. Implications of these notions on portfolio choice are discussed. We cover model-independent diversification preferences, preferences within models of choice under risk, including expected utility theory and the more general rank-dependent expected utility theory, as well as models of choice under uncertainty axiomatized via Choquet expected utility theory. Remarks on interpretations of diversification preferences within models of behavioral choice are given in the conclusion.
Recommendations
- Diversification, convex preferences and non-empty core in the Choquet expected utility model.
- Choices at various levels of uncertainty: an experimental test of the restated diversification theorem
- Diversity of preferences in an unpredictable environment
- Preference heterogeneity and its equilibrium path
- Divergence of choices despite similarity of characteristics: An application of catastrophe theory
- Heterogeneous Choice Sets and Preferences
- Incremental risk aversion and diversification preference
- Diversification effect of heterogeneous beliefs
- A generalized theory of preference
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Cited in
(10)- Diversity of preferences in an unpredictable environment
- Taste for diversity and the optimality of economic growth
- Do investors like to diversify? A study of Markowitz preferences
- Asset Demand Without the Independence Axiom
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- Non-diversified portfolios with subjective expected utility
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