Title: Correlation Neglect in Portfolio Choice: Lab Evidence
Abstract: 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 portfolio-allocation problems and find it to be strongly imperfect. Our experiment uses pairs of problems having the same span of assets — identical sets of attainable returns — but different correlations between assets. While expected-utility theory makes the same prediction across paired problems, subjects behave very differently within pairs. We find evidence for correlation neglect — treating correlated variables as uncorrelated — as well as for the "1/n heuristic" — investing half of wealth each of the two available assets.
Publication Year: 2016
Publication Date: 2016-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 37
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