Correlation Concern

Résumé

The alternatives' payoffs in a choice problem are determined by the interaction of several distinct variables. I propose and axiomatize a model of a decision maker (DM) who recognizes that she may not accurately perceive the correlation between these variables, and who takes this into account when making her decision. She chooses as if she calculates each alternative's expected outcome under multiple possible correlation structures, and then evaluates it according to the worst expected outcome. The model captures a number of interesting behaviors exhibited by a sophisticated agent who recognizes that she does not understand how portfolios are correlated.