Second-order uncertainty and naive diversification

Ola Mahmoud

Economics Letters, 2022, vol. 216, issue C

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.

Keywords: Second-order uncertainty; Ambiguity; Naive diversification; Principle of indifference (search for similar items in EconPapers)
JEL-codes: D01 D80 D81 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:216:y:2022:i:c:s0165176522001574

DOI: 10.1016/j.econlet.2022.110554

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