Diversification preferences in the theory of choice
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Publication:524890
DOI10.1007/S10203-016-0182-4zbMATH Open1398.91173arXiv1507.02025OpenAlexW3125647549MaRDI QIDQ524890FDOQ524890
Authors: Enrico G. De Giorgi, Ola Mahmoud 
Publication date: 27 April 2017
Published in: Decisions in Economics and Finance (Search for Journal in Brave)
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.
Full work available at URL: https://arxiv.org/abs/1507.02025
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Decision theory (91B06) Individual preferences (91B08) Portfolio theory (91G10) Utility theory (91B16)
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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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- Preferences over all random variables: incompatibility of convexity and continuity
- Diversity as a Response to User Preference Uncertainty
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- A powerful tool for analyzing concave/convex utility and weighting functions
- Non-diversified portfolios with subjective expected utility
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