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.
KeywordsComplexity Mistakes Credit Choice Experiment Salience
JEL ClassificationC91 D03 D14 G02
We would like to thank David Cooper, Enrique Fatas, Paul Frijters, Changxia Ke, Alex Imas, Nikos Nikiforakis, Wieland Müller, Matteo Ploner, Jan Potters and Philipp Wichardt for their comments, as well as the audiences at the University of Munich, 6th Annual Australia New Zealand Workshop on Experimental Economics at Monash University, 2011 European Workshop on Behavioral and Experimental Economics at the University of Munich, 2011 North-American ESA Meeting, 2012 MBEES at Maastricht University and 2012 Experimental Finance Conference at the University of Luxembourg for their comments and suggestions.
- Abeler, J., & Jäger, S. (2013). Complex tax incentives—An experimental investigation. American Economic Journal (forthcoming).Google Scholar
- Ausubel, L. (1999). Adverse selection in the credit card market. Working Paper. University of Maryland.Google Scholar
- Beshears, J., Choi, J. J., Laibson, D., & Madrian, B. C. (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.Google Scholar
- Luce, D. (1959). Individual choice behaviour. New York: Wiley.Google Scholar
- Lusardi, A., & Tufano, P. (2009). Debt literacy, financial experiences, and overindebtedness. NBER Working Paper 14808.Google Scholar
- McFadden, D. (1973). Conditional logit analysis of qualitative choice behavior. In P. Zarembka (Ed.), Frontiers in econometrics (Chapter 4). New York: Academic Press.Google Scholar
- OECD. (2005). Improving Financial Literacy: Analysis of Issues and Policies. Paris: OECD Publishing.Google Scholar
- Simon, H. A. (1957). Models of man: Social and rational. New York: Wiley.Google Scholar
- Stizia, S., Zheng, J., & Zizzo, D. (2011). Complexity and smart nudges for inattentive consumers. Working Paper.Google Scholar