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Gains from diversification: a regret theory approach

  • Martín Jorge Egozcue

    ()

    (Universidad de la República)

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    In this paper we analyze a regret-averse individual best choice in a two risky assets portfolio. We extend previous literature and contribute new results by considering a model with two assets. We get the conditions for the regret-averse investor to diversify the portfolio. We additionally compare the behavior of the regret-averse investor with the behavior of its risk-averse counterpart. We characterize the conditions under which both types of agents behavior coincide.

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    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I1-P19.pdf
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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 32 (2012)
    Issue (Month): 1 ()
    Pages: 204-219

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    Handle: RePEc:ebl:ecbull:eb-11-00635
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    1. Loomes, Graham & Sugden, Robert, 1987. "Some implications of a more general form of regret theory," Journal of Economic Theory, Elsevier, vol. 41(2), pages 270-287, April.
    2. Egozcue, Martín & García, Luis Fuentes & Wong, Wing-Keung & Zitikis, Ricardas, 2011. "Do investors like to diversify? A study of Markowitz preferences," European Journal of Operational Research, Elsevier, vol. 215(1), pages 188-193, November.
    3. Quiggin, John, 1994. "Regret Theory with General Choice Sets," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 153-65, March.
    4. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
    5. Anna Dodonova & Yuri Khoroshilov, 2009. "Behavioral biases in auctions: an experimental study," Economics Bulletin, AccessEcon, vol. 29(3), pages 2218-2226.
    6. Michenaud, Sébastien & Solnik, Bruno, 2008. "Applying regret theory to investment choices: Currency hedging decisions," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 677-694, September.
    7. Franco Pellerey & Patrizia Semeraro, 2005. "A Note on the Portfolio Selection Problem," Theory and Decision, Springer, vol. 59(4), pages 295-306, December.
    8. Michael Braun & Alexander Muermann, 2004. "The Impact of Regret on the Demand for Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 737-767.
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