Eyster, Erik and Weizsacker, Georg (2011) Correlation neglect in financial decision-making. Discussion Papers, 1104. DIW, 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 |
| Uncontrolled Keywords: | portfolio choice, correlation neglect, 1/n heuristic, biases in beliefs |
| Library of Congress subject classification: | H Social Sciences > HB Economic Theory |
| Journal of Economic Literature Classification System: | B - Schools of Economic Thought and Methodology > B4 - Economic Methodology > B49 - Other |
| Sets: | Departments > Economics Collections > Economists Online |
| Rights: | http://www.lse.ac.uk/library/rights/LSERO.htm |
| Identification Number: | 1104 |
| URL: | http://eprints.lse.ac.uk/41888/ |
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