Diversification, gambling and market forces

  • Marie-Hélène Broihanne
  • Maxime Merli
  • Patrick Roger
Original Research


Though simple and appealing, mean-variance portfolio choice theory does not describe actual diversification choices by investors, especially their propensity to gamble and the solvency constraints they face. Using 8 million trades realized by 90,000 individual investors, we show that diversification choices are in fact strongly driven by the skewness of returns, especially in bull markets, but also by the amount to be invested in risky assets. Increasing this amount by 10 % leads to increase by 3.8 % the number of stocks in investors’ portfolios, controlling for portfolio skewness. An important contribution of this paper is to show that the strength of the relationship between diversification and the skewness of returns is shaped by market forces. A strong negative relationship exists in bull markets but disappears in bear markets, a result not found in the literature. Our results survive several robustness checks, including controlling for individual heterogeneity and time-variability of stock price co-movements.


Individual investors Return skewness Diversification Gambling 

JEL Classification

G02 G11 



We thank an anonymous referee for suggesting improvements in preceding versions of the paper. We also thank Laurent Deville, Gunter Franke, Burton Hollifield, Jens Jackwerth, Gregory Nini, Charles Noussair, Winfried Pohlmeier, Mark Seasholes, Pierre Six, Marc Willinger, the participants of the DMM meeting (2011, Montpellier), the Konztanz-Strasbourg Workshop (2011, Königsfeld), the Behavioral Insurance Meeting (2011, München), the French Finance Association Meeting (2014) for comments and suggestions. The financial supports of OEE (Observatoire de l’Epargne Européenne) and CCR Asset Management are gratefully acknowledged. We thank Tristan Roger for valuable research assistance and computer programming.


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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  • Marie-Hélène Broihanne
    • 1
  • Maxime Merli
    • 1
  • Patrick Roger
    • 1
  1. 1.LARGE Research Center, EM Strasbourg Business SchoolUniversity of StrasbourgStrasbourg CedexFrance

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