Preference for Simplicity
48 Pages Posted: 18 Oct 2018 Last revised: 22 Jun 2020
Date Written: September 22, 2018
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
Suggested Citation: Suggested Citation