All Eggs, One Basket: When Diversification Backfires in Risk Modeling
“Don’t put all your eggs in one basket” has long been gospel in finance and risk management. But what if sometimes, the basket is the safer place? In a surprising twist on conventional wisdom, Léonard Vincent’s latest paper presents the one-basket theorem: a theoretical framework that proves diversification can increase risk under certain extreme but relevant conditions. Specifically, when dealing with heavy-tailed risks that have infinite mean — such as those found in insurance, operational risk, and even crypto markets — putting all your eggs in one basket may be the rational choice. ...