Risk, ambiguity, and the value of diversification

Loïc Berger and Louis Eeckhoudt ()
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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

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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.

Keywords: Diversification; ambiguity aversion; model uncertainty; hedging (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-mic, nep-rmg and nep-upt
Note: View the original document on HAL open archive server: https://hal.science/hal-02910906
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Published in Management Science, 2021, 67 (3), pp.1639-1647. ⟨10.1287/mnsc.2020.3823⟩

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Working Paper: Risk, ambiguity, and the value of diversification (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02910906

DOI: 10.1287/mnsc.2020.3823

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