IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v69y2023i6p3400-3414.html

How to Alleviate Correlation Neglect in Investment Decisions

Author

Listed:
  • Christine Laudenbach

    (Leibnitz Institute for Financial Research Sustainable Architecture for Finance in Europe, D-60323 Frankfurt am Main, Germany)

  • Michael Ungeheuer

    (Department of Finance, Aalto University, FI-00076 Aalto, Finland)

  • Martin Weber

    (University of Mannheim, School of Business, D-68131 Mannheim, Germany; Centre for Economic Policy Research, London EC1V 3PZ, United Kingdom)

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 versus private investors).

Suggested Citation

  • Christine Laudenbach & Michael Ungeheuer & Martin Weber, 2023. "How to Alleviate Correlation Neglect in Investment Decisions," Management Science, INFORMS, vol. 69(6), pages 3400-3414, June.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:6:p:3400-3414
    DOI: 10.1287/mnsc.2022.4535
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2022.4535
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2022.4535?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
    2. Michael Ungeheuer & Martin Weber, 2021. "The Perception of Dependence, Investment Decisions, and Stock Prices," Journal of Finance, American Finance Association, vol. 76(2), pages 797-844, April.
    3. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, vol. 56(5), pages 1747-1764, October.
    4. Hertwig, Ralph, 2017. "When to consider boosting: some rules for policy-makers," Behavioural Public Policy, Cambridge University Press, vol. 1(2), pages 143-161, November.
    5. Fred Schroyen & Karl Ove Aarbu, 2018. "Attitudes Towards Large Income Risk in Welfare States: An International Comparison," Economica, London School of Economics and Political Science, vol. 85(340), pages 846-872, October.
    6. Rüdiger Weber & Annika Weber & Christine Laudenbach & Johannes Wohlfart, 2021. "Beliefs About the Stock Market and Investment Choices: Evidence from a Field Experiment," CEBI working paper series 21-17, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    7. Craig R. Fox & Liat Hadar, 2006. ""Decisions from experience" = sampling error + prospect theory: Reconsidering Hertwig, Barron, Weber & Erev (2004)," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 1, pages 159-161, November.
    8. Christine Laudenbach & Annika Weber & Rüdiger Weber & Johannes Wohlfart, 2021. "Beliefs about the Stock Market and Investment Choices: Evidence from a Survey and a Field Experiment," CESifo Working Paper Series 9427, CESifo.
    9. Mark Grinblatt & Matti Keloharju, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, June.
    10. Francesco D’Acunto & Nagpurnanand Prabhala & Alberto G Rossi, 2019. "The Promises and Pitfalls of Robo-Advising," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1983-2020.
    11. Kimball, Miles S & Sahm, Claudia R & Shapiro, Matthew D, 2008. "Imputing Risk Tolerance From Survey Responses," Journal of the American Statistical Association, American Statistical Association, vol. 103(483), pages 1028-1038.
    12. Christine Kaufmann & Martin Weber & Emily Haisley, 2013. "The Role of Experience Sampling and Graphical Displays on One's Investment Risk Appetite," Management Science, INFORMS, vol. 59(2), pages 323-340, July.
    13. Ido Kallir & Doron Sonsino, 2009. "The Neglect of Correlation in Allocation Decisions," Southern Economic Journal, John Wiley & Sons, vol. 75(4), pages 1045-1066, April.
    14. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    15. Kroll, Yoram & Levy, Haim & Rapoport, Amnon, 1988. "Experimental Tests of the Separation Theorem and the Capital Asset Pricing Model," American Economic Review, American Economic Association, vol. 78(3), pages 500-519, June.
    16. Daniel Paravisini & Veronica Rappoport & Enrichetta Ravina, 2017. "Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios," Management Science, INFORMS, vol. 63(2), pages 279-297, February.
    17. Edward T. Cokely & Mirta Galesic & Eric Schulz & Saima Ghazal & Rocio Garcia-Retamero, 2012. "Measuring risk literacy: The Berlin Numeracy Test," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(1), pages 25-47, January.
    18. Metrick, Andrew, 1995. "A Natural Experiment in "Jeopardy!"," American Economic Review, American Economic Association, vol. 85(1), pages 240-253, March.
    19. Christine Laudenbach & Annika Weber & Johannes Wohlfart, 2021. "Beliefs About the Stock Market and Investment Choices: Evidence from a Field Experiment," ECONtribute Discussion Papers Series 128, University of Bonn and University of Cologne, Germany.
    20. Nicholas Reinholtz & Philip M. Fernbach & Bart de Langhe, 2021. "Do People Understand the Benefit of Diversification?," Management Science, INFORMS, vol. 67(12), pages 7322-7343, December.
    21. Ido Kallir & Doron Sonsino, 2009. "The Neglect of Correlation in Allocation Decisions," Southern Economic Journal, Southern Economic Association, vol. 75(4), pages 1045-1066, April.
    22. Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 373-416.
    23. Chen, Daniel L. & Schonger, Martin & Wickens, Chris, 2016. "oTree—An open-source platform for laboratory, online, and field experiments," Journal of Behavioral and Experimental Finance, Elsevier, vol. 9(C), pages 88-97.
    24. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Florian Mudekereza, 2025. "Aggregate Efficiency in Games," Papers 2501.13019, arXiv.org, revised Feb 2026.
    2. Katharina Hartinger & Erik Sarrazin & David J. Streich, 2025. "Banking for Boomers – A Field Experiment on Technology Adoption in Financial Services," Working Papers 2505, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 27 Mar 2025.
    3. Borsboom, Charlotte & Duxbury, Darren & Nieber, Alexander & Zeisberger, Stefan, 2024. "Domain-dependent diversification: The influence of gain–loss domain on correlation choice," Journal of Economic Behavior & Organization, Elsevier, vol. 227(C).
    4. Moritz Loewenfeld & Jiakun Zheng, 2026. "Uncovering Correlation Sensitivity in Decision Making Under Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 67(2), pages 513-532, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Ungeheuer & Martin Weber, 2021. "The Perception of Dependence, Investment Decisions, and Stock Prices," Journal of Finance, American Finance Association, vol. 76(2), pages 797-844, April.
    2. Weber, Martin & Laudenbach, Christine & Ungeheuer, Michael, 2019. "How to Alleviate Correlation Neglect," CEPR Discussion Papers 13737, Centre for Economic Policy Research.
    3. Weber, Martin & Ungeheuer, Michael, 2016. "The Perception of Dependence and Investment Decisions," CEPR Discussion Papers 11188, Centre for Economic Policy Research.
    4. Markus Dertwinkel-Kalt & Mats Köster, 2025. "Salient Cues and Complexity," Management Science, INFORMS, vol. 71(1), pages 428-469, January.
    5. Olschewski, Sebastian & Diao, Linan & Rieskamp, Jörg, 2021. "Reinforcement learning about asset variability and correlation in repeated portfolio decisions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    6. Alex Chinco & Samuel M. Hartzmark & Abigail B. Sussman, 2022. "A New Test of Risk Factor Relevance," Journal of Finance, American Finance Association, vol. 77(4), pages 2183-2238, August.
    7. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    8. Pinger, Pia & Schäfer, Sebastian & Schumacher, Heiner, 2018. "Locus of control and consistent investment choices," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 75(C), pages 66-75.
    9. Pinger, Pia & Schäfer, Sebastian & Schumacher, Heiner, 2018. "Locus of control and consistent investment choices," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 75(C), pages 66-75.
    10. Filiz, Ibrahim & Nahmer, Thomas & Spiwoks, Markus & Gubaydullina, Zulia, 2020. "Measurement of risk preference," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    11. Sesil Lim & Bas Donkers & Patrick Dijl & Benedict G. C. Dellaert, 2021. "Digital customization of consumer investments in multiple funds: virtual integration improves risk–return decisions," Journal of the Academy of Marketing Science, Springer, vol. 49(4), pages 723-742, July.
    12. Hossain, Tanjim & Okui, Ryo, 2024. "Belief formation under signal correlation," Games and Economic Behavior, Elsevier, vol. 146(C), pages 160-183.
    13. Ibrahim Filiz & Thomas Nahmer & Markus Spiwoks & Kilian Bizer, 2018. "Portfolio diversification: the influence of herding, status-quo bias, and the gambler’s fallacy," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 32(2), pages 167-205, May.
    14. D’Acunto, Francesco & Ghosh, Pulak & Rossi, Alberto G., 2026. "How costly are cultural biases? Evidence from FinTech," Journal of Financial Economics, Elsevier, vol. 175(C).
    15. John Y. Campbell, 2016. "Restoring Rational Choice: The Challenge of Consumer Financial Regulation," American Economic Review, American Economic Association, vol. 106(5), pages 1-30, May.
    16. Zeckhauser, Richard Jay & Tran, Ngoc-Khanh, 2011. "The Behavior of Savings and Asset Prices When Preferences and Beliefs are Heterogeneous," Scholarly Articles 5027955, Harvard Kennedy School of Government.
    17. Andries, Marianne & Bianchi, Milo & Huynh, Karen & Pouget, Sebastien, 2024. "Return Predictability, Expectations, and Investment: Experimental Evidence," CEPR Discussion Papers 19239, Centre for Economic Policy Research.
    18. Thorp, S. & Bateman, H. & Dobrescu, L.I. & Newell, B.R. & Ortmann, A., 2020. "Flicking the switch: Simplifying disclosure to improve retirement plan choices," Journal of Banking & Finance, Elsevier, vol. 121(C).
    19. Alistair Macaulay & James Moberly, 2022. "Heterogeneity in imperfect inflation expectations:theory and evidence from a novel survey," Economics Series Working Papers 970, University of Oxford, Department of Economics.
    20. Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," Economics Working Papers ECO2008/31, European University Institute.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:69:y:2023:i:6:p:3400-3414. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.