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Risk, ambiguity, and the value of diversification

Author

Listed:
  • Loic Berger

    (CNRS, IESEG School of Management, Univ. Lille, UMR 9221-LEM, F-59000 Lille, France)

  • Louis Eeckhoudt

    (IESEG School of Management, UMR 9221-LEM, F-59000 Lille, France)

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 aversionbut (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

  • Loic Berger & Louis Eeckhoudt, 2021. "Risk, ambiguity, and the value of diversification," Working Papers 2021-iRisk-02, IESEG School of Management.
    • Handle: RePEc:ies:wpaper:e202104
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    References listed on IDEAS

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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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