Eyster, Erik and Weizsacker, Georg (2011) Correlation neglect in financial decision-making. Discussion Papers (1104). Deutsches Institut für Wirtschaftsforschung, Berlin, Germany.
Full text not available from this repository.Abstract
Good decision-making often requires people to perceive and handle a myriad of statistical correlations. Notably, optimal portfolio theory depends upon a sophisticated understanding of the correlation among financial assets. In this paper, we examine people's understanding of correlation using a sequence of portfolio-allocation problems and find it to be strongly imperfect. Our experiment uses pairs of portfolio-choice problems that have the same asset span|identical sets of attainable returns|and differ only in the assets' correlation. While any outcome-based theory of choice makes the same prediction across paired problems, subjects behave very differently across pairs. We find evidence for correlation neglect|treating correlated variables as uncorrelated|as well as for a form of \1/n heuristic"|investing half of wealth each of the two available assets.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | http://www.diw.de/en/diw_01.c.100406.en/publicatio... |
| Additional Information: | © 2011 DIW |
| Divisions: | Economics |
| Subjects: | H Social Sciences > HB Economic Theory |
| JEL classification: | B - Schools of Economic Thought and Methodology > B4 - Economic Methodology > B49 - Other |
| Date Deposited: | 14 Feb 2012 11:26 |
| Last Modified: | 13 Sep 2024 20:19 |
| URI: | http://eprints.lse.ac.uk/id/eprint/41888 |
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