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Second-order uncertainty and naive diversification

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  • Mahmoud, Ola

Abstract

This paper introduces a new model for decision making under ambiguity called second-order uncertainty. The decision maker considers all probability distributions associated with the given options, and chooses the allocation that minimizes the variability of outcome across all probabilities. Optimal allocation under second-order uncertainty is the equal weighted allocation, also called naive diversification.

Suggested Citation

  • Mahmoud, Ola, 2022. "Second-order uncertainty and naive diversification," Economics Letters, Elsevier, vol. 216(C).
    • Handle: RePEc:eee:ecolet:v:216:y:2022:i:c:s0165176522001574
    DOI: 10.1016/j.econlet.2022.110554
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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