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Correlation Neglect and Overconfidence. An Experimental Study

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  • Markus Spiwoks
  • Kilian Bizer

Abstract

For the first time in economic research, the present experimental study confronted participants with the task to predict stock prices ex ante in order to analyze the interrelation of the behavioral anomalies overconfidence and correlation neglect. The study shows that the participants considerably overestimate their accuracy of forecasting (overconfidence). Almost half of all participants (42.2%) disregard the correlation among return developments for different financial instruments (correlation neglect). It was also observed that the correlation neglect, when forecasting diversified financial instruments (funds), has a cushioning effect onoverconfidence.JEL classification numbers: G02, G11, G12, G17, D81, D84Keywords: Behavioral Finance, Experiments, Stock Price Forecasts, Correlation Neglect, Overconfidence

Suggested Citation

  • Markus Spiwoks & Kilian Bizer, 2018. "Correlation Neglect and Overconfidence. An Experimental Study," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(3), pages 1-5.
    • Handle: RePEc:spt:apfiba:v:8:y:2018:i:3:f:8_3_5
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    More about this item

    Keywords

    behavioral finance; experiments; stock price forecasts; correlationâ neglect; overconfidence;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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