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Diversification Preferences in the Theory of Choice

De Giorgi, Enrico and Mahmoud, Ola. (2016) Diversification Preferences in the Theory of Choice. Decisions in economics and finance, 39 (2). pp. 143-174.

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Official URL: https://edoc.unibas.ch/74251/

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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 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.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Corporate Finance (Mahmoud)
UniBasel Contributors:Mahmoud, Ola
Item Type:Article, refereed
Article Subtype:Research Article
Publisher:Springer
e-ISSN:1129-6569
Note:Publication type according to Uni Basel Research Database: Journal article
Identification Number:
Last Modified:03 Apr 2020 19:31
Deposited On:03 Apr 2020 19:31

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