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Andrew Ellis, LSE Print
Tuesday, 18 October 2016, 14:00 - 15:15

Andrew Ellis, London School of Economics

Correlation Misperception in Choice

Abstract: We present a decision-theoretic analysis of an agent's understanding of the interdependencies in her choices. We provide the foundations for a simple and flexible model that allows the misperception of correlated risks. We introduce a framework in which the decision maker chooses a portfolio of assets among which she may misperceive the joint returns, and present simple axioms equivalent to a representation in which she attaches a probability to each possible joint distribution over returns and then maximizes subjective expected utility using her (possibly misspecified) beliefs. 

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