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. --
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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:
- Benjamin Enke & Florian Zimmermann, 2013. "Correlation Neglect in Belief Formation," CESifo Working Paper Series 4483, CESifo Group Munich.
- 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," 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)
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