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Risk, ambiguity, and the value of diversification

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  • Loïc Berger

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux])

  • Louis Eeckhoudt

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

Abstract

Diversification is a basic economic principle that helps to hedge against uncertainty. It is therefore intuitive that both risk aversion and ambiguity aversion should positively affect the value of diversification. In this paper, we show that this intuition (1) is true for risk aversion but (2) is not necessarily true for ambiguity aversion. We derive sufficient conditions, showing that, contrary to the economic intuition, ambiguity and ambiguity aversion may actually reduce the diversification value.

Suggested Citation

  • Loïc Berger & Louis Eeckhoudt, 2021. "Risk, ambiguity, and the value of diversification," Post-Print hal-02910906, HAL.
    • Handle: RePEc:hal:journl:hal-02910906
    DOI: 10.1287/mnsc.2020.3823
    Note: View the original document on HAL open archive server: https://hal.science/hal-02910906
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    More about this item

    Keywords

    Diversification; ambiguity aversion; model uncertainty; hedging;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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