Investors Systematically Misjudge Correlated Information, New Wharton Research Finds

Investors consistently make a specific type of error when processing market information, treating related data points as independent when they're actually correlated—a behavioral quirk that helps explain persistent patterns in stock returns, according to new research from Wharton finance professor Jessica Wachter.

The phenomenon, which Wachter and co-author Hongye Guo call "correlation neglect," represents a fundamental challenge to assumptions about market efficiency. For CFOs and finance leaders managing portfolios or evaluating market signals, the research suggests that even sophisticated investors may be systematically overweighting certain types of information without realizing it.

The paper, "Correlation Neglect in Asset Prices," published February 10, 2026, identifies a striking pattern in U.S. stock market returns tied to how investors process multiple signals about the same underlying reality. When several pieces of news or data points stem from a common source—say, multiple analyst reports reacting to the same earnings release, or several economic indicators reflecting the same underlying trend—investors tend to treat each piece as independent confirmation rather than recognizing they're looking at the same information through different lenses.

"What if investors aren't processing information as efficiently as we've assumed?" the researchers ask. The question matters because correlation neglect isn't just a laboratory curiosity—it appears to leave measurable fingerprints in actual market prices.

The research builds on behavioral finance literature but focuses specifically on how correlation (or the lack of recognition of it) affects asset pricing. While traditional finance theory assumes investors efficiently aggregate all available information, Wharton's findings suggest a more nuanced reality: investors can be quite good at processing individual data points but surprisingly poor at recognizing when those points are telling them the same thing.

For corporate finance leaders, the implications extend beyond portfolio management. The same cognitive pattern that affects how investors price securities likely influences how finance teams evaluate capital allocation decisions, assess risk across business units, or interpret multiple forecasts that may stem from similar assumptions.

The research doesn't suggest investors are irrational—rather, that they're making a specific, predictable type of error when dealing with correlated information streams. That predictability is what makes the finding potentially actionable for finance professionals who recognize the pattern.

Wachter, whose research focuses on behavioral approaches to asset pricing, has previously explored how investor psychology affects market outcomes. This latest work adds to a growing body of evidence that even sophisticated market participants are vulnerable to systematic biases—not because they lack intelligence or information, but because of how human cognition processes complex, interrelated data.

The key question for finance leaders: if correlation neglect affects how markets price securities, where else in the corporate finance function might the same bias be lurking?