Seminar 217, Risk Management: How elementary is diversification?

Seminar: Risk Seminar | March 5 | 11 a.m.-12:30 p.m. | 648 Evans Hall

 Speakers: Ola Mahmoud, University of Zurich

 Consortium for Data Analytics in Risk

Diversification is a fundamental concept in financial economics, risk management, and decision theory. From a broad perspective, it conveys the idea of introducing variety to a set of objects. Today, there is general consensus that some form of diversification is beneficial in asset allocation, however its definition is context-dependent and there is no consensus on a widely accepted, mathematically concise and economically sound notion of diversification. Indeed, there is an ongoing debate about what the “best” level of diversification should be. There is also a recent trend of evaluating certain diversifying heuristics as being “anomalous” and “irrational”. In this talk, I shall approach the notion of diversification from a foundational perspective by asking how elementary it really is. I take the view that diversification is a behavioural choice heuristic and an evolutionary cognitive adaptation that is selectively advantageous under many economic and financial circumstances. The talk will dig deeper into the roots of this paradigm; first, through an experimental study on children that looks into whether they would diversify in a sequence of gambles aimed at replicating typical portfolio choice scenarios; then by formulating an evolutionary theory of diversification.