Correlation Misperception in Choice
Andrew Ellis, Michele Piccione
American Economic Review · 2017 · Volume 107 · Issue 4
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.
Keywords
Consumer Economics: Theory, Criteria for Decision-Making under Risk and Uncertainty, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Portfolio Choice, Investment Decisions
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