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Correlation Misperception in Choice

Author

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  • Andrew Ellis
  • Michele Piccione
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.

Suggested Citation

  • Andrew Ellis & Michele Piccione, 2017. "Correlation Misperception in Choice," American Economic Review, American Economic Association, vol. 107(4), pages 1264-1292, April.
    • Handle: RePEc:aea:aecrev:v:107:y:2017:i:4:p:1264-92
    Note: DOI: 10.1257/aer.20160093
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Larry G Epstein & Yoram Halevy, 2019. "Ambiguous Correlation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(2), pages 668-693.
    2. Norio Takeoka & Takashi Ui, 2021. "Imprecise Information and Second-Order Beliefs," Working Papers on Central Bank Communication 037, University of Tokyo, Graduate School of Economics.
    3. Gilat Levy & Inés Moreno de Barreda & Ronny Razin, 2022. "Persuasion with Correlation Neglect: A Full Manipulation Result," American Economic Review: Insights, American Economic Association, vol. 4(1), pages 123-138, March.
    4. Mira Frick & Ryota Iijima & Yuhta Ishii, 2018. "Dispersed Behavior and Perceptions in Assortative Societies," Cowles Foundation Discussion Papers 2128R2, Cowles Foundation for Research in Economics, Yale University, revised Oct 2021.
    5. Yiling Chen & Alon Eden & Juntao Wang, 2021. "Cursed yet Satisfied Agents," Papers 2104.00835, arXiv.org, revised Nov 2021.
    6. Andrew Ellis, 2021. "Correlation Concern," Papers 2105.13341, arXiv.org.
    7. Philippe Jehiel, 2022. "Analogy-Based Expectation Equilibrium and Related Concepts:Theory, Applications, and Beyond," Working Papers halshs-03735680, HAL.
    8. Pooya Molavi, 2019. "Macroeconomics with Learning and Misspecification: A General Theory and Applications," 2019 Meeting Papers 1584, Society for Economic Dynamics.
    9. Levy, Gilat & Razin, Ronny, 2019. "Echo chambers and their effects on economic and political outcomes," LSE Research Online Documents on Economics 101413, London School of Economics and Political Science, LSE Library.
    10. Hossain, Tanjim & Okui, Ryo, 2024. "Belief formation under signal correlation," Games and Economic Behavior, Elsevier, vol. 146(C), pages 160-183.
    11. Levy, Gilat & Razin, Ronny, 2022. "Combining forecasts in the presence of ambiguity over correlation structures," Journal of Economic Theory, Elsevier, vol. 199(C).
    12. Echenique, Federico & Miyashita, Masaki & Nakamura, Yuta & Pomatto, Luciano & Vinson, Jamie, 2022. "Twofold multiprior preferences and failures of contingent reasoning," Journal of Economic Theory, Elsevier, vol. 202(C).
    13. Pauline Vorjohann, 2023. "Reference-dependent choice bracketing," Discussion Papers 2309, University of Exeter, Department of Economics.
    14. Chollete, Lorán & de la Peña, Victor & Klass, Michael, 2023. "The price of independence in a model with unknown dependence," Mathematical Social Sciences, Elsevier, vol. 123(C), pages 51-58.
    15. Yair Antler ad Ran Spiegler, 2024. "Competitive Markets with Imperfectly Discerning Consumers," Papers 2409.14885, arXiv.org.
    16. Andrew Ellis & David J. Freeman, 2024. "Revealing Choice Bracketing," American Economic Review, American Economic Association, vol. 114(9), pages 2668-2700, September.
    17. Mira Frick & Ryota Iijima & Yuhta Ishii, 2018. "Dispersed Behavior and Perceptions in Assortative Societies," Cowles Foundation Discussion Papers 2128R3, Cowles Foundation for Research in Economics, Yale University, revised Jun 2022.
    18. Ghirardato, Paolo & Pennesi, Daniele, 2020. "A general theory of subjective mixtures," Journal of Economic Theory, Elsevier, vol. 188(C).
    19. Jawwad Noor, 2019. "Intuitive Beliefs," Cowles Foundation Discussion Papers 2216, Cowles Foundation for Research in Economics, Yale University.
    20. Andrew Ellis & Heidi Christina Thysen, 2021. "Subjective Causality in Choice," Papers 2106.05957, arXiv.org, revised Dec 2022.

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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