Decisions in Economics and Finance

, Volume 39, Issue 2, pp 143–174

Diversification preferences in the theory of choice


DOI: 10.1007/s10203-016-0182-4

Cite this article as:
De Giorgi, E.G. & Mahmoud, O. Decisions Econ Finan (2016) 39: 143. doi:10.1007/s10203-016-0182-4


Diversification represents the idea of choosing variety over uniformity. Within the theory of choice, desirability of diversification is axiomatized as preference for a convex combination of choices that are equivalently ranked. This corresponds to the notion of risk aversion when one assumes the von Neumann–Morgenstern expected utility model, but the equivalence fails to hold in other models. This paper analyzes axiomatizations of the concept of diversification and their relationship to the related notions of risk aversion and convex preferences within different choice theoretic models. Implications of these notions on portfolio choice are discussed. We cover model-independent diversification preferences, preferences within models of choice under risk, including expected utility theory and the more general rank-dependent expected utility theory, as well as models of choice under uncertainty axiomatized via Choquet expected utility theory. Remarks on interpretations of diversification preferences within models of behavioral choice are given in the conclusion.


Diversification Risk aversion Convex preferences Portfolio choice 

JEL Classification

D81 G11 

Copyright information

© Springer-Verlag Italia 2016

Authors and Affiliations

  1. 1.Department of Economics, School of Economics and Political ScienceUniversity of St. GallenSt. GallenSwitzerland
  2. 2.Faculty of Mathematics and Statistics, School of Economics and Political ScienceUniversity of St. GallenSt. GallenSwitzerland
  3. 3.Center for Risk Management ResearchUniversity of CaliforniaBerkeleyUSA

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