Gains from diversification: a regret theory approach

Abstract

In this paper we analyze a regret-averse individual best choice in a two risky assets portfolio. We extend previous literature and contribute new results by considering a model with two assets. We get the conditions for the regret-averse investor to diversify the portfolio. We additionally compare the behavior of the regret-averse investor with the behavior of its risk-averse counterpart. We characterize the conditions under which both types of agents behavior coincide.optimization; diversification; regret theory; quadrant dependent.