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Risk, ambiguity, and diversification


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2016-03-11

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Universidad del Rosario

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Abstract
Attitudes toward risk influence the decision to diversify among uncertain options. Yet, because in most situations the options are ambiguous, attitudes toward ambiguity may also play an important role. I conduct a laboratory experiment to investigate the effect of ambiguity on the decision to diversify. I find that diversification is more prevalent and more persistent under ambiguity than under risk. Moreover, excess diversification under ambiguity is driven by participants who stick with a status quo gamble when diversification among gambles is not feasible. This behavioral pattern cannot be accommodated by major theories of choice under ambiguity.
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risk , inertia , diversification , reference-dependent preferences , indecisiveness , ambiguity aversion
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