Han et al. 2021 documented something relating to the "under diversification puzzle":
Standard explanations for under diversification include hedging motives and heterogeneous preferences, but several studies highlight the limitations of these explanations
From Statman, 2004, I understand that "under diversification puzzle" is normally, we should hold a portfolio of around 300 stocks but in U.S, the average investor hold is only 3 or 4 stocks.
I understand that "hedging motives" is that risk aversion, meaning investors need to buy some stocks to reduce the risk of the portfolio. "heterogeneous preference" is that each individual investor has their own risk preference. However, given the understanding above, I cannot understand why we can use "hedging motives" and "heterogeneous preferences" to explain the "underdiversification puzzle"