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Correlation misperception in choice

Ellis, Andrew and Piccione, Michele (2017) Correlation misperception in choice. American Economic Review, 107 (4). pp. 1264-1292. ISSN 0002-8282

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Identification Number: 10.1257/aer.20160093

Abstract

We present a decision-theoretic analysis of an agent’s understanding of the interdependencies in her choices. We provide the foundations for a simple and flexible model that allows the misperception of correlated risks. We introduce a framework in which the decision maker chooses a portfolio of assets among which she may misperceive the joint returns, and present simple axioms equivalent to a representation in which she attaches a probability to each possible joint distribution over returns and then maximizes subjective expected utility using her (possibly misspecified) beliefs.

Item Type: Article
Official URL: https://www.aeaweb.org/journals/aer
Additional Information: © 2017 American Economic Association
Divisions: Economics
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
Sets: Departments > Economics
Collections > Economists Online
Date Deposited: 22 Nov 2016 15:22
Last Modified: 20 Mar 2019 03:09
URI: http://eprints.lse.ac.uk/id/eprint/68326

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