Irony of diversification
Imagine you are stranded on a desert island. For fresh water, there are three natural springs, but it is possible one or more have been poisoned. To minimize your risk, what is your optimal strategy for drinking from the springs? You might:
- select one of the three springs at random and drink exclusively from it
- select two of the springs at random and drink exclusively from them, or
- drink from all three springs.
Your best strategy is to drink from just one spring. Yet, according to a certain financial theory, the optimal strategy is the diversified approach of drinking from all three springs.