Preference for Simplicity

Abstract

This paper introduces and axiomatizes representations in which the agent assesses a lottery less favorably if it contains more outcomes. These representations, which we term simplicity theory, are motivated by experimental evidence. They capture as special cases expected utility, the certainty effect, and a range of laboratory and empirical phenomena. We compare simplicity theory to existing theories including expected utility theory and prospect theory. We provide parametric examples of simplicity theory, and relate the theory to applications including risk aversion, frequency with which people choose dominated options, cognitive psychology research, and household financial behavior.

Keywords: preferences under risk, experimental evidence, expected utility, complexity aversion, lottery support, risk aversion, cognitive psychology

JEL Classification: D01, D81, D90