Posted by: Nicholas Davis | October 22, 2010

The power of diversified thinking

Just had this thought process:

1) In the context of finance, diversification is the “closest thing to a free lunch” – it allows you to reduce portfolio variance below the variance of your least-risky asset.
2) Diversification, while costly, can also be a good strategy (within certain limits) outside finance – conglomerates follow this model. If you are risk averse, diversifying in real investments either vertically or horizontally might be a good idea.
3) If you buy my argument about “mental model risk” in the previous post, you should also try and diversify your mental models – consciously consider multiple frameworks for “the way the world works”. By diversifying your *thinking*, you will be able to manage uncertainty better (via preparedness, avoiding mental model risk, perhaps by discovering innovative ways to diversify or create real options that would otherwise have been hidden etc.)

So, is this a good title for a book: the power of diversified thinking? It’s really just another way of framing scenario thinking, but perhaps the concept of diversification has power due to its call to finance, Markowitz etc.

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