ABSTRACT
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Mainstream economics assumes that as rational individuals, we take our decisions on the basis of
the relative costs and benefits of our action. The technique of cost/benefit analysis (discussed in
chapter 25 in this volume) spells out in detail the problem of choosing the best from a number of
alternatives. However, often the question of optimum choice does not involve accepting the best
one over all others. Frequently we must determine the optimal mix-spread out our efforts or
resources among a number of competing alternatives in a way that best serves our purpose.
Thus, if we have a fixed amount of money that we want to invest in the stock market, we may
not want to put all our eggs in one basket. Instead, we might want to spread the risk and choose an
optimum mix of investments that would maximize our return by keeping within reasonable bounds
our concerns for risk, uncertainty, and liquidity of assets.
