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Asset Demands without the Independence Axiom

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Author Info
Dekel, Eddie

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Abstract

An important application of the theory of choice under uncertainty is to asset markets, and an important property in these markets is a preference for portfolio diversification. If an investor is an expected utility maximizer, then he is risk averse if, and only if, he exhibits a preference for diversification. This paper examines the relationship between risk aversion and portfolio diversification when preferences over probability distributions of wealth do not have an expected utility representation. Although risk aversion is not sufficient to guarantee a preference for portfolio diversification, it is necessary. Quasiconcavity of the preference functional (over probability distributions of wealth), together with risk aversion, does imply a preference for portfolio diversification. Copyright 1989 by The Econometric Society.

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Publisher Info
Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 57 (1989)
Issue (Month): 1 (January)
Pages: 163-69
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Handle: RePEc:ecm:emetrp:v:57:y:1989:i:1:p:163-69

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  1. Ghirardato, Paolo & Marinacci, Massimo, 2000. "Risk, Ambigity and the Separation of Utility and Beliefs," Working Papers 1085, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
    Other versions:
  2. Guerdjikova, Ani, 2004. "Preference for Diversification with Similarity Considerations," Sonderforschungsbereich 504 Publications 04-48, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  3. Alain Chateauneuf & Ghizlane Lakhnati, 2007. "From sure to strong diversification," Economic Theory, Springer, vol. 32(3), pages 511-522, September. [Downloadable!] (restricted)
  4. Alain Chateauneuf & Jean-Marc Tallon, 2000. "Diversification, Convex Preferences and Non-Empty Core," Econometric Society World Congress 2000 Contributed Papers 0751, Econometric Society. [Downloadable!]
    Other versions:
  5. Alain Chateauneuf & Ghizlane Lakhnati, 2005. "From sure to strong diversification," Cahiers de la Maison des Sciences Economiques b05035, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
  6. Alon Harel & Zvi Safra & Uzi Segal, 2003. "Ex-Post Egalitarianism," Boston College Working Papers in Economics 563, Boston College Department of Economics. [Downloadable!]
  7. Aldo Montesano, 2008. "Effects of Uncertainty Aversion on the Call Option Market," Theory and Decision, Springer, vol. 65(2), pages 97-123, September. [Downloadable!] (restricted)
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