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  3. American Economic Review
  4. April 2017
  5. Correlation Misperception in Choice

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Correlation Misperception in Choice

  • Andrew Ellis
  • Michele Piccione
American Economic Review
vol. 107, no. 4, April 2017
(pp. 1264–92)
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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.

Citation

Ellis, Andrew, and Michele Piccione. 2017. "Correlation Misperception in Choice." American Economic Review, 107 (4): 1264–92. DOI: 10.1257/aer.20160093

Additional Materials

JEL Classification

  • 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