@techreport{Eyster2011Correlation,
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.},
address = {Berlin},
author = {Erik Eyster and Georg Weizs\"{a}cker},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {B49; 330; portfolio choice; correlation neglect; 1/N heuristic; biases in beliefs},
language = {eng},
number = {1104},
publisher = {Deutsches Institut f\"{u}r Wirtschaftsforschung (DIW)},
title = {Correlation neglect in financial decision-making},
type = {DIW Discussion Papers},
url = {http://hdl.handle.net/10419/52523},
year = {2011}
}