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Clarity comments on Open Thread August 31 - September 6 - Less Wrong Discussion
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Is there absolute utilitty maximisation in portfolio diversification or is that just a risk control mechanism? Could I pick one random stock and put a whole lot of money in it? I suspect I may be commiting the law of large numbers here (or the gambler's fallacy).
If you're not familiar with it, you should check out www.bogleheads.com for investment/finance advice.
(Not trying to discourage you from discussing this here... just that if you don't know bogleheads, it's quite valuable)
Look at Kelly Betting for some information on why "risk control" is utility maximization.
Presuming you have declining marginal utility for money, picking one random stock gives you the same average/expected monetary outcome, but far lower utility.
It's purely for risk control, but most people are extremely loss averse and so do well to diversify.
You could. It's a bet with positive expectation and a really risky one. But people do much dumber things with their money. Having said that, I'd recommend an index fund instead if you're plopping a whole lot of money in.