Preference for Diversification with Similarity Considerations

Abstract

The paper studies the connection between the form of the similarity function of a decision-maker and his willingness to diversify. It is shown that preference for diversification obtain for both high and low aspiration levels if the similarity function is convex in the Euclidean distance. However, a decision-maker with a concave similarity function and relatively high aspiration level will fail to choose diversified acts, even if his utility function is concave.