Correlation Misperception in Choice
- (pp. 1264-92)
AbstractWe 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.
CitationEllis, Andrew, and Michele Piccione. 2017. "Correlation Misperception in Choice." American Economic Review, 107 (4): 1264-92. DOI: 10.1257/aer.20160093
- D11 Consumer Economics: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- G11 Portfolio Choice; Investment Decisions