How to alleviate correlation neglect in investment decisions


Laudenbach, Christine ; Ungeheuer, Michael ; Weber, Martin



Document Type: Article
Year of publication: 2022
The title of a journal, publication series: Management Science
Volume: tba
Issue number: tba
Page range: 1-44
Place of publication: Cantonsville, MD
Publishing house: INFORMS
ISSN: 0025-1909 , 1526-5501
Related URLs:
Publication language: English
Institution: Business School > ABWL u. Bankbetriebslehre (Seniorprofessur) (Weber 2017-)
Subject: 330 Economics
Classification: JEL: C91 , G02 , G11,
Keywords (English): correlation neglect , diversification , fintech , investment decisions , risk taking
Abstract: We experimentally study how presentation formats for return distributions affect investors' diversification choices. We find that sampling returns alleviates correlation neglect and constitutes an effective way to improve financial decisions. When participants get a description of the probabilities for outcomes of the joint return distribution, we confirm the findings of others that investors neglect the correlation between assets in their diversification choices. However, when participants sample from the joint distribution, they change their allocation between two assets in response to a change in their correlation in the predicted direction. The results are robust across two experiments that have participants with varying experience (students vs. private investors).

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