|Kalaycı, Kenan; Serra-Garcia, Marta (May 2012): Complexity and Biases. Discussion Papers in Economics 2012-16|
We examine experimentally how complexity affects decision-making, when individuals choose among different products with varying benefits and costs. We find that complexity in costs leads to choosing a high-benefit product, with high costs and overall lower payoffs. In contrast, when complexity is in the benefits of the product, we cannot reject the hypothesis of random mistakes. We also examine the role of heterogeneous complexity. We find that individuals still (mistakenly) choose the high-benefit but costly product, even if cheaper and simple products are available. Our results suggest that salience is a main driver of choices under different forms of complexity.
|Item Type:||Paper (Discussion Paper)|
|Keywords:||Complexity, Credit, Mistakes, Narrow Bracketing|
Economics > Munich Discussion Papers in Economics
|Subjects:||300 Social sciences > 300 Social sciences, sociology and anthropology|
300 Social sciences > 330 Economics
|JEL Classification:||C91, D03, D14, G02|
|Deposited On:||29. May 2012 11:15|
|Last Modified:||28. Jul 2016 12:55|
 Abeler, J., and S. Jäger, 2013. Complex Tax Incentives - An Experimental Investigation. American Economic Journal: Economic Policy, forthcoming.
 Ausubel, L., 1999. Adverse Selection in the Credit Card Market. Working Paper. University of Maryland.
 Bertrand, M. and A. Morse, 2011. Information Disclosure, Cognitive Biases and Payday Borrowing. Journal of Finance 66 (6), 1865-1893.
 Beshears J., Choi J. J., Laibson D. and B. C. Madrian, 2010. How Does Simplified Disclosure Affect Individuals Mutual Fund Choices? In D. A. Wise, ed. Explorations in the Economics of Aging. Chicago: University of Chicago Press.
 Blavastkyy, P. and G. Pogrebna, 2010. Stochastic Choice and Decision Theories. Journal of Applied Econometrics 25, 963-986.
 Bordalo, P., Gennaioli, N., and A. Shleifer, 2013. Salience and Consumer Choice. Journal of Political Economy, 121(5), 803-843.
 Brown, J., Hossain, T. and J. Morgan, 2010. Shrouded Attributes and Information Suppression: Evidence from the Field. Quarterly Journal of Economics 125 (2), 859-876.
 Campbell, J. Y., 2006. Household Finance. Journal of Finance 61 (4), 1553-1604.
 Caplin, A., Dean, M. and D. Martin, 2011. Search and Satisficing. American Economic Review 101 (7), 2899-2922
 Carlin, B., 2009. Strategic Price Complexity in Financial Retail Markets. Journal of Financial Economics 91, 278-287.
 Chetty, R., Looney, A., and K. Kroft, 2009. Salience and Taxation: Theory and Evidence. The American Economic Review, 99(4), 1145-1177.
 Choi, J. J., Laibson, D. and B. C. Madrian, 2010. Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds. Review of Financial Studies 32 (4), 1405-1432.
 Fischbacher, U., 2007. z-Tree: Zurich Toolbox for Ready-made Economic Experiments. Experimental Economics 10, 171-178.
 Finkelstein, A., 2009. E-ztax: Tax salience and tax rates. Quarterly Journal of Economics, 124(3), 969-1010.
 Gabaix, X. and D. Laibson, 2006. Shrouded attributes, consumer myopia, and information suppression in competitive markets. Quarterly Journal of Economics 121, 505-539.
 Harrison, G. and J. List, 2004. Field Experiments. Journal of Economic Literature 42(4), 1013-1059.
 Huck, S. and G. Weizsäcker, 1999. Risk, complexity, and deviations from expected-value maxi- mization: Results of a lottery choice experiment. Journal of Economic Psychology 20, 699-715.
 Kalayci, K. and J. Potters, 2011. Buyer confusion and market prices. International Journal of Industrial Organization 29 (1), 14-22.
 Kalayci, K., 2015. Price complexity and buyer confusion in markets. Journal of Economic Behavior and Organization 111, 154-168.
 Köszegi, B., and A. Szeidl, 2013. A Model of Focusing in Economic Choice. Quarterly Journal of Economics, 128 (1).
 Luce, D., 1959. Individual Choice Behaviour. Wiley: New York.
 Lusardi, A. and P. Tufano, 2009. Debt Literacy, Financial Experiences, and Overindebtedness. NBER Working Paper 14808.
 McFadden, D., 1973. Conditional Logit Analysis of Qualitative Choice Behavior. Frontiers in Econometrics, Chapter 4. Edited by P. Zarembka. Academic Press: New York.
 McKelvey, R. D., and T. R. Palfrey, 1995. Quantal Response Equilibria for Normal Form Games. Games and Economic Behavior 10, 6-38.
 OECD, 2005. Improving Financial Literacy: Analysis of Issues and Policies. OECD Publishing: Paris.
 Ortoleva, P. 2013. The price of flexibility: Towards a theory of Thinking Aversion. Journal of Economic Theory 148, 903-934.
 Read, D., Loewenstein, G. and M. Rabin, 1999. Choice Bracketing. Journal of Risk and Uncertainty 19(1-3), 171-197.
 Simon, H. A. 1957. Models of Man: Social and Rational. New York: Wiley.
 Spiegler, R., 2011. Bounded Rationality and Industrial Organization. Oxford University Press.
 Stizia, S. and D. Zizzo, 2011. Does product complexity matter for competition in experimental retail markets? Theory and Decision 70, 65-82.
 Stizia, S., j. Zheng and D. Zizzo, 2011. Complexity and Smart Nudges for Inattentive Consumers. Working Paper.
 Wilcox, N., 1993. Lottery Choice: Incentives, Complexity and Decision Time. Economic Journal 103 (421), 1397-1417.