How to Alleviate Correlation Neglect

Martin Weber, Christine Laudenbach and Michael Ungeheuer

No 13737, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We experimentally study how presentation formats for return distributions affect investors' diversification choices. We find that sampling returns alleviates correlationneglect and constitutes an effective way to improve financial decisions. When participants get a description of probabilities for outcomes of the joint return distribution, we confirm the common finding that investors neglect the correlation between assets in their diversification choices. However, when participants sample from the joint distribution, they incorporate correlation into choices as predicted by normative theory. Results are robust across three experiments with varying expertise and experience of participants (students vs. investors), and varying return distributions (discrete, continuous).

Keywords: Investment decisions; Diversification; Correlation neglect; Risk taking; Fintech (search for similar items in EconPapers)
JEL-codes: C91 G02 G11 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-pay
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Citations: View citations in EconPapers (6)

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