Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/74642
Authors: 
Enke, Benjamin
Zimmermann, Florian
Year of Publication: 
2013
Series/Report no.: 
Bonn Econ Discussion Papers 04/2013
Abstract: 
Many information structures generate correlated rather than mutually independent signals, the news media being a prime example. This paper shows experimentally that in such context many people neglect these correlations in the updating process and treat correlated information as independent. In consequence, people’s beliefs are excessively sensitive to well-conncected information sources, implying a pattern of “overshooting” beliefs. Additionally, in an experimental asset market, correlation neglect not only drives overoptimism and overpessimism at the individual level, but also affects aggregate outcomes in a systematic manner. In particular, the excessive confidence swings caused by correlated signals give rise to predictable price bubbles and cashes. These findings are reminiscent of popular narratives according to which aggregate booms and busts might be driven by the spread of “stories”. Our results also lend direct support to recent models of boundedly rational social learning.
Subjects: 
Beliefs
Correlation Neglect
Experiments
Markets
Overshooting
JEL: 
C91
D03
D83
D84
D40
Document Type: 
Working Paper

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