Diversification Preferences in the Theory of Choice
Journal
Decisions in economics and finance : a journal of applied mathematics
ISSN
1593-8883
ISSN-Digital
1129-6569
Type
journal article
Date Issued
2016-11-11
Author(s)
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 analyzes 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.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Publisher
Springer Italia
Publisher place
Milano
Volume
39
Number
2
Start page
143
End page
174
Eprints ID
251767
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Name
div_review_v7.pdf
Size
385.29 KB
Format
Adobe PDF
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