Correlation Neglect in Belief Formation

Benjamin Enke and Florian Zimmermann

No 4483, CESifo Working Paper Series from CESifo

Abstract: Many information structures generate correlated rather than mutually independent signals, the news media being a prime example. This paper shows experimentally that in such contexts many people neglect these correlations in the updating process and treat correlated information as independent. In consequence, people’s beliefs are excessively sensitive to well-connected information sources, implying a pattern of “overshooting” beliefs. Additionally, in an experimental asset market, correlation neglect not only drives overoptimism and overpessimism at the individual level, but also affects aggregate outcomes in a systematic manner. In particular, the excessive confidence swings caused by correlated signals give rise to predictable price bubbles and crashes. These findings are reminiscent of popular narratives according to which aggregate booms and busts might be driven by the spread of “stories”. Our results also lend direct support to recent models of boundedly rational social learning.

Keywords: beliefs; correlation neglect; experiments; markets; overshooting (search for similar items in EconPapers)
JEL-codes: C91 D03 D40 D83 D84 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp4483.pdf (application/pdf)

Related works:
Journal Article: Correlation Neglect in Belief Formation (2019)
Working Paper: Correlation Neglect in Belief Formation (2013)
Working Paper: Correlation Neglect in Belief Formation (2013)
Working Paper: Correlation Neglect in Belief Formation (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4483

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().