Risk, ambiguity, and the value of diversification

Loïc Berger (1, 2, 3) , Louis Eeckhoudt (1)

1 LEM - Lille économie management - UMR 9221
2 CNRS - Centre National de la Recherche Scientifique
3 IÉSEG School Of Management [Puteaux]

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.

Mots clés: Diversification; ambiguity aversion; model uncertainty; hedging

Domaines: Economies et finances; Gestion des risques [q-fin.RM]

Loïc Berger, Louis Eeckhoudt. Risk, ambiguity, and the value of diversification. Management Science, 2021, 67 (3), pp.1639-1647. ⟨10.1287/mnsc.2020.3823⟩. ⟨hal-02910906⟩