Focus,
Thanks again for your analysis. First and easiest to answer, my e mail address is in the yellow mail box by my name.
If you "work through the math", you may want to look at Ghiselli's book "Theory of Psychological Measurement", 1964 pp. 234,235., that shows the derivation of the square root as a correction for error of measurement in a correlation. Other books are: Hays, Statistics for Psychologists 1963, pp. 501, 502, and Nunnally, 1978, Psyhcometric Theory, p. 238.
The correlational method is the Pearson Product Moment Correlation, a least square fit formula, as I understand it. The equation assumes interval data. As you correctly point out (Hats off to you again) rating scales do not meet this assumption. The numbers are ordinal, not interval and only rank differences in the numbers can be assumed. Behavioral Scientists are fast and loose with assumptions at times, but since their data is pretty sloppy most of the time it usually doesn't matter.
Regarding negative correlations and the square root, this is not a problem because it is assumed that in a judgement task that the range of values are between zero and one. If the correlations are not significantly greater then zero, then the whole study would be dropped and the conclusion would be that people simply can't make a particular judgement.
I have to give some thought to the Monte Carlo method and how it could be used. I know of one study that varied reliability distribution means and standard deviations to determine how the outcomes would differ from some expected results. I have go back and do some home work before I can respond in any more detail.
Please send a note to my e mail address, so I can contact you. I have a couple other questions, but I should probably take them off line, so Dark Clouds can get back to quoting novelist's opinions of science.
Larc (of the Science is more fun than pioneering class)