Correlation Neglect in Belief Formation
AbstractA frequent feature of information structures is that they generate signals which are not mutually independent, but rather rely on a common set of underlying information. Using a simple experimental design, we show that in such contexts many people neglect correlations in the updating process, leading to systematically "overshooting" beliefs. This finding lends direct support to recent models of boundedly rational learning in social networks. In an experimental market setting, 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 produced by correlated information structures translate into predictable price bubbles and crashes. Finally, we show the robustness of correlation neglect in a naturally occurring informational environment, in which subjects predict GDP growth on the basis of real news reports. --
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79900.
Date of creation: 2013
Date of revision:
Other versions of this item:
- Enke, Benjamin & Zimmermann, Florian, 2013. "Correlation Neglect in Belief Formation," IZA Discussion Papers 7372, Institute for the Study of Labor (IZA).
- Benjamin Enke & Florian Zimmermann, 2013. "Correlation Neglect in Belief Formation," CESifo Working Paper Series 4483, CESifo Group Munich.
- Benjamin Enke & Florian Zimmermann, 2013. "Correlation Neglect in Belief Formation," Bonn Econ Discussion Papers bgse04_2013, University of Bonn, Germany.
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D40 - Microeconomics - - Market Structure and Pricing - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-02 (All new papers)
- NEP-EXP-2014-02-02 (Experimental Economics)
- NEP-NEU-2014-02-02 (Neuroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gneezy, U. & Kapteyn, A. & Potters, J.J.M., 2002.
"Evaluation Periods and Asset Prices in a Market Experiment,"
2002-8, Tilburg University, Center for Economic Research.
- Uri Gneezy & Arie Kapteyn & Jan Potters, 2003. "Evaluation Periods and Asset Prices in a Market Experiment," Journal of Finance, American Finance Association, vol. 58(2), pages 821-838, 04.
- Uri Gneezy & Arie Kapteyn & Jan Potters, 2002. "Evaluation Periods and Assett Prices in a Market Experiment," Working Papers 02-02, RAND Corporation Publications Department.
- Luca Corazzini & Filippo Pavesi & Beatrice Petrovich & Luca Stanca, 2010.
"Influential Listeners: An Experiment on Persuasion Bias in Social Networks,"
196, University of Milano-Bicocca, Department of Economics, revised Aug 2010.
- Corazzini, Luca & Pavesi, Filippo & Petrovich, Beatrice & Stanca, Luca, 2012. "Influential listeners: An experiment on persuasion bias in social networks," European Economic Review, Elsevier, vol. 56(6), pages 1276-1288.
- Grebe, Tim & Schmid, Julia & Stiehler, Andreas, 2006.
"Do individuals recognize cascade behavior of others? An Experimental Study,"
Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems
180, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Grebe, Tim & Schmid, Julia & Stiehler, Andreas, 2008. "Do individuals recognize cascade behavior of others? - An experimental study," Journal of Economic Psychology, Elsevier, vol. 29(2), pages 197-209, April.
- Tim Grebe & Julia Schmid & Andreas Stiehler, 2006. "Do Individuals Recognize Cascade Behavior of Others? - An Experimental Study -," SFB 649 Discussion Papers SFB649DP2006-079, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Brian D. Kluger & Steve B. Wyatt, 2004. "Are Judgment Errors Reflected in Market Prices and Allocations? Experimental Evidence Based on the Monty Hall Problem," Journal of Finance, American Finance Association, vol. 59(3), pages 969-998, 06.
- repec:kap:expeco:v:1:y:1998:i:1:p:43-62 is not listed on IDEAS
- Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2010.
"Salience Theory of Choice Under Risk,"
NBER Working Papers
16387, National Bureau of Economic Research, Inc.
- Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, . "Salience Theory of Choice Under Risk," Working Paper 29210, Harvard University OpenScholar.
- Shleifer, Andrei & Bordalo, Pedro & Gennaioli, Nicola, 2012. "Salience Theory of Choice Under Risk," Scholarly Articles 10636303, Harvard University Department of Economics.
- Andrei Shleifer & Nicola Gennaioli & Pedro Bordalo, 2011. "Salience theory of choice under risk," 2011 Meeting Papers 1442, Society for Economic Dynamics.
- George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
- Selten, Reinhard, 1996.
"Axiomatic Characterization of the Quadratic Scoring Rule,"
Discussion Paper Serie B
390, University of Bonn, Germany.
- Reinhard Selten, 1998. "Axiomatic Characterization of the Quadratic Scoring Rule," Experimental Economics, Springer, vol. 1(1), pages 43-61, June.
- Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009.
"Cognitive abilities and behavioral biases,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 72(1), pages 147-152, October.
- Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2008. "Cognitive Abilities and Behavioral Biases," IZA Discussion Papers 3481, Institute for the Study of Labor (IZA).
- Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2008. "Cognitive Abilities and Behavioral Biases," Sonderforschungsbereich 504 Publications 08-05, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
- Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive Abilities and Behavioral Biases," Working Papers 0465, University of Heidelberg, Department of Economics.
- Camerer, Colin F, 1987. "Do Biases in Probability Judgment Matter in Markets? Experimental Evidence," American Economic Review, American Economic Association, vol. 77(5), pages 981-97, December.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
- Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
- Bormann, Sven-Kristjan, 2013. "Sentiment indices on financial markets: What do they measure?," Economics Discussion Papers 2013-58, Kiel Institute for the World Economy.
- Pietro Ortoleva & Erik Snowberg, 2013. "Overconfidence in Political Behavior," NBER Working Papers 19250, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.