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dc.contributor.authorEyster, Eriken_US
dc.contributor.authorWeizsäcker, Georgen_US
dc.description.abstractGood 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.en_US
dc.publisher|aDeutsches Institut für Wirtschaftsforschung (DIW) |cBerlinen_US
dc.relation.ispartofseries|aDIW Discussion Papers |x1104en_US
dc.subject.keywordportfolio choiceen_US
dc.subject.keywordcorrelation neglecten_US
dc.subject.keyword1/N heuristicen_US
dc.subject.keywordbiases in beliefsen_US
dc.titleCorrelation neglect in financial decision-makingen_US
dc.typeWorking Paperen_US

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