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Correlation Misperception in Choice

Andrew Ellis () and Michele Piccione

American Economic Review, 2017, vol. 107, issue 4, 1264-92

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.

JEL-codes: D11 D81 D83 G11 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20160093
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Handle: RePEc:aea:aecrev:v:107:y:2017:i:4:p:1264-92