ORIGINAL RESEARCH Diversification, gambling and market forces Marie-He´le`ne Broihanne • Maxime Merli • Patrick Roger Ó Springer Science+Business Media New York 2015 Abstract 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. Keywords Individual investors  Return skewness  Diversification  Gambling JEL Classification G02  G11 1 Introduction In an economy governed by the standard theory of portfolio choice, investors hold diversified portfolios. They are looking for a profile of returns characterized by a high first M.-H. Broihanne  M. Merli  P. Roger (&) LARGE Research Center, EM Strasbourg Business School, University of Strasbourg, 61 avenue de la foreˆt noire, 67085 Strasbourg Cedex, France e-mail: proger@unistra.fr M.-H. Broihanne e-mail: mhb@unistra.fr M. Merli e-mail: merli@unistra.fr 123 Rev Quant Finan Acc DOI 10.1007/s11156-015-0497-1