IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2501.13019.html
   My bibliography  Save this paper

Correlation Neglect in Games

Author

Listed:
  • Florian Mudekereza

Abstract

This paper proposes a simple framework to study the effect of correlation neglect on social learning and welfare in games with social incentives. It examines statistical learners (frequentists, Bayesians, etc.) who make decisions based on their peers' actions but overlook the correlation between the actions they observe. A novel solution concept called correlated sampling equilibrium with statistical inference (CoSESI) reveals that correlation neglect affects strategic behavior through persistent overprecision, which leads to polarization and information cascades. CoSESI always exists and differs from existing concepts. It captures the fact that naive beliefs are overly sensitive to correlations, which causes failures of social learning. Applications of CoSESI in matching markets, monopoly pricing, and financial markets demonstrate that correlation neglect bears significant economic consequences.

Suggested Citation

  • Florian Mudekereza, 2025. "Correlation Neglect in Games," Papers 2501.13019, arXiv.org.
    • Handle: RePEc:arx:papers:2501.13019
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2501.13019
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Yuval Salant & Josh Cherry, 2020. "Statistical Inference in Games," Econometrica, Econometric Society, vol. 88(4), pages 1725-1752, July.
    2. Ignacio Esponda & Demian Pouzo, 2016. "Berk–Nash Equilibrium: A Framework for Modeling Agents With Misspecified Models," Econometrica, Econometric Society, vol. 84, pages 1093-1130, May.
    3. Philipp Denter & Martin Dumav & Boris Ginzburg, 2021. "Social Connectivity, Media Bias, and Correlation Neglect," The Economic Journal, Royal Economic Society, vol. 131(637), pages 2033-2057.
    4. Sergio Currarini & Giovanni Ursino & A K S Chand, 2020. "Strategic Transmission of Correlated Information," The Economic Journal, Royal Economic Society, vol. 130(631), pages 2175-2206.
    5. Sethi, Rajiv, 2021. "Stable sampling in repeated games," Journal of Economic Theory, Elsevier, vol. 197(C).
    6. Benjamin Enke & Florian Zimmermann, 2019. "Correlation Neglect in Belief Formation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 313-332.
    7. Ran Spiegler, 2016. "Bayesian Networks and Boundedly Rational Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1243-1290.
    8. Lori Beaman & Jeremy Magruder, 2012. "Who Gets the Job Referral? Evidence from a Social Networks Experiment," American Economic Review, American Economic Association, vol. 102(7), pages 3574-3593, December.
    9. Bolte, Lukas & Fan, Tony Q., 2024. "Motivated mislearning: The case of correlation neglect," Journal of Economic Behavior & Organization, Elsevier, vol. 217(C), pages 647-663.
    10. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    11. Osborne, Martin J & Rubinstein, Ariel, 1998. "Games with Procedurally Rational Players," American Economic Review, American Economic Association, vol. 88(4), pages 834-847, September.
    12. Hossain, Tanjim & Okui, Ryo, 2024. "Belief formation under signal correlation," Games and Economic Behavior, Elsevier, vol. 146(C), pages 160-183.
    13. Galit Shmueli & Thomas P. Minka & Joseph B. Kadane & Sharad Borle & Peter Boatwright, 2005. "A useful distribution for fitting discrete data: revival of the Conway–Maxwell–Poisson distribution," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 54(1), pages 127-142, January.
    14. Davide Cantoni & David Y Yang & Noam Yuchtman & Y Jane Zhang, 2019. "Protests as Strategic Games: Experimental Evidence from Hong Kong's Antiauthoritarian Movement," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(2), pages 1021-1077.
    15. Matthew O. Jackson & Leeat Yariv, 2007. "Diffusion of Behavior and Equilibrium Properties in Network Games," American Economic Review, American Economic Association, vol. 97(2), pages 92-98, May.
    16. Eryilmaz, Serkan, 2018. "On success runs in a sequence of dependent trials with a change point," Statistics & Probability Letters, Elsevier, vol. 132(C), pages 91-98.
    17. Nicholas M. Kiefer, 2011. "Default estimation, correlated defaults, and expert information," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 173-192, March.
    18. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    19. Levy, Gilat & Razin, Ronny, 2015. "Does Polarisation of Opinions Lead to Polarisation of Platforms? The Case of Correlation Neglect," Quarterly Journal of Political Science, now publishers, vol. 10(3), pages 321-355, September.
    20. Gilat Levy & Inés Moreno de Barreda & Ronny Razin, 2022. "Persuasion with Correlation Neglect: A Full Manipulation Result," American Economic Review: Insights, American Economic Association, vol. 4(1), pages 123-138, March.
    21. repec:bla:anzsta:v:46:y:2004:i:1:p:53-57 is not listed on IDEAS
    22. Milgrom, Paul, 1981. "An Axiomatic Characterization of Common Knowledge," Econometrica, Econometric Society, vol. 49(1), pages 219-222, January.
    23. Andrew Ellis & Michele Piccione, 2017. "Correlation Misperception in Choice," American Economic Review, American Economic Association, vol. 107(4), pages 1264-1292, April.
    24. Simon Board & Moritz Meyer‐ter‐Vehn, 2021. "Learning Dynamics in Social Networks," Econometrica, Econometric Society, vol. 89(6), pages 2601-2635, November.
    25. Alex Rees-Jones & Ran Shorrer & Chloe Tergiman, 2024. "Correlation Neglect in Student-to-School Matching," American Economic Journal: Microeconomics, American Economic Association, vol. 16(3), pages 1-42, August.
    26. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    27. Simin He & Simas Kučinskas, 2024. "Expectation Formation with Correlated Variables," The Economic Journal, Royal Economic Society, vol. 134(660), pages 1517-1544.
    28. Osborne, Martin J. & Rubinstein, Ariel, 2003. "Sampling equilibrium, with an application to strategic voting," Games and Economic Behavior, Elsevier, vol. 45(2), pages 434-441, November.
    29. Peter M. DeMarzo & Dimitri Vayanos & Jeffrey Zwiebel, 2003. "Persuasion Bias, Social Influence, and Unidimensional Opinions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 909-968.
    30. Sushil Bikhchandani & David Hirshleifer & Omer Tamuz & Ivo Welch, 2024. "Information Cascades and Social Learning," Journal of Economic Literature, American Economic Association, vol. 62(3), pages 1040-1093, September.
    31. 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.
    32. Alex Rees-Jones & Ran Shorrer, 2023. "Behavioral Economics in Education Market Design: A Forward-Looking Review," Journal of Political Economy Microeconomics, University of Chicago Press, vol. 1(3), pages 557-613.
    33. George A. Akerlof & Robert J. Shiller, 2010. "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism," Economics Books, Princeton University Press, edition 1, number 9163.
    34. Pietro Ortoleva & Erik Snowberg, 2015. "Overconfidence in Political Behavior," American Economic Review, American Economic Association, vol. 105(2), pages 504-535, February.
    35. Laura K. Gee & Jason Jones & Moira Burke, 2017. "Social Networks and Labor Markets: How Strong Ties Relate to Job Finding on Facebook’s Social Network," Journal of Labor Economics, University of Chicago Press, vol. 35(2), pages 485-518.
    36. Niederle, Muriel & Vespa, Emanuel, 2023. "Cognitive Limitations: Failures of Contingent Thinking," University of California at San Diego, Economics Working Paper Series qt5q14p1np, Department of Economics, UC San Diego.
    37. Sawa, Ryoji & Wu, Jiabin, 2023. "Statistical inference in evolutionary dynamics," Games and Economic Behavior, Elsevier, vol. 137(C), pages 294-316.
    38. Muriel Niederle & Emanuel Vespa, 2023. "Cognitive Limitations: Failures of Contingent Thinking," Annual Review of Economics, Annual Reviews, vol. 15(1), pages 307-328, September.
    39. Matthew O. Jackson, 2019. "The Friendship Paradox and Systematic Biases in Perceptions and Social Norms," Journal of Political Economy, University of Chicago Press, vol. 127(2), pages 777-818.
    40. 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.
    41. Moser, Johannes & Wallmeier, Niklas, 2021. "Correlation neglect in voting decisions: An experiment," Economics Letters, Elsevier, vol. 198(C).
    Full references (including those not matched with items on IDEAS)

    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. Mira Frick & Ryota Iijima & Yuhta Ishii, 2018. "Dispersed Behavior and Perceptions in Assortative Societies," Cowles Foundation Discussion Papers 2128, Cowles Foundation for Research in Economics, Yale University.
    2. Mira Frick & Ryota Iijima & Yuhta Ishii, 2018. "Dispersed Behavior and Perceptions in Assortative Societies," Cowles Foundation Discussion Papers 2128R3, Cowles Foundation for Research in Economics, Yale University, revised Jun 2022.
    3. Philippe Jehiel, 2022. "Analogy-Based Expectation Equilibrium and Related Concepts:Theory, Applications, and Beyond," Working Papers halshs-03735680, HAL.
    4. Spiegler, Ran, 2021. "Modeling players with random “data access”," Journal of Economic Theory, Elsevier, vol. 198(C).
    5. Ryoji Sawa, 2022. "Statistical Inference in Evolutionary Dynamics," Working Papers e170, Tokyo Center for Economic Research.
    6. Sawa, Ryoji & Wu, Jiabin, 2023. "Statistical inference in evolutionary dynamics," Games and Economic Behavior, Elsevier, vol. 137(C), pages 294-316.
    7. Srinivas Arigapudi & Yuval Heller & Amnon Schreiber, 2023. "Heterogeneous Noise and Stable Miscoordination," Papers 2305.10301, arXiv.org, revised Jan 2025.
    8. Levy, Gilat & Razin, Ronny, 2022. "Combining forecasts in the presence of ambiguity over correlation structures," Journal of Economic Theory, Elsevier, vol. 199(C).
    9. Izquierdo, Segismundo S. & Izquierdo, Luis R., 2022. "Stability of strict equilibria in best experienced payoff dynamics: Simple formulas and applications," Journal of Economic Theory, Elsevier, vol. 206(C).
    10. Arieli, Itai & Arigapudi, Srinivas, 2024. "Private signals and fast product adoption under incomplete information," Games and Economic Behavior, Elsevier, vol. 147(C), pages 377-387.
    11. Pleshcheva, Vlada & Klapper, Daniel & Dannewald, Till, 2019. "On Factors of Consumer Heterogeneity in (Mis)Valuation of Future Energy Costs: Evidence for the German Automobile Market," Rationality and Competition Discussion Paper Series 140, CRC TRR 190 Rationality and Competition.
    12. Duarte Gonc{c}alves, 2022. "Sequential Sampling Equilibrium," Papers 2212.07725, arXiv.org, revised Nov 2023.
    13. Hossain, Tanjim & Okui, Ryo, 2024. "Belief formation under signal correlation," Games and Economic Behavior, Elsevier, vol. 146(C), pages 160-183.
    14. Levy, Gilat & Razin, Ronny, 2018. "Information diffusion in networks with the Bayesian Peer Influence heuristic," Games and Economic Behavior, Elsevier, vol. 109(C), pages 262-270.
    15. Cheng, Ing-Haw & Hsiaw, Alice, 2022. "Distrust in experts and the origins of disagreement," Journal of Economic Theory, Elsevier, vol. 200(C).
    16. Maxim Senkov & Toygar T. Kerman, 2024. "Changing Simplistic Worldviews," Papers 2401.02867, arXiv.org.
    17. Arigapudi, Srinivas & Heller, Yuval & Schreiber, Amnon, 2021. "Sampling Dynamics and Stable Mixing in Hawk–Dove Games," MPRA Paper 108819, University Library of Munich, Germany.
    18. Larry Samuelson & Jakub Steiner, 2024. "Constrained data-fitters," ECON - Working Papers 460, Department of Economics - University of Zurich.
    19. Inés Moreno de Barreda & Gilat Levy & Ronny Razin, 2017. "Persuasion with Correlation Neglect: Media Power via Correlation of News Content," Economics Series Working Papers 836, University of Oxford, Department of Economics.
    20. Yves Le Yaouanq & Peter Schwardmann, 2022. "Learning About One’s Self," Journal of the European Economic Association, European Economic Association, vol. 20(5), pages 1791-1828.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:arx:papers:2501.13019. 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: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    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.