Journal of Applied Finance & Banking

Correlation Neglect and Overconfidence. An Experimental Study

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  • 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 on
    overconfidence.

    JEL classification numbers: G02, G11, G12, G17, D81, D84
    Keywords: Behavioral Finance, Experiments, Stock Price Forecasts, Correlation Neglect, Overconfidence