Salient Cues and Complexity

Abstract

Important decisions are often complex, and existing evidence suggests that complexity can affect economic behavior. It is an open question, however, exactly when and how complexity matters. We hypothesize that "salient cues" - standing out in the choice context - mitigate the effect of complexity on choices. We theoretically develop and experimentally test this hypothesis in the context of portfolio selection. We find that, in both simple and complex problems, subjects seek highly right-skewed portfolios, which have an extreme and salient upside, and avoid highly left-skewed portfolios with an extreme and salient downside. Complexity does affect, however, choices among symmetric portfolios, which have neither a salient up- nor downside. In fact, absent a salient cue subjects "diversify naively." Evidence on response times and memory supports our salience-based explanation.

Keywords: Salience, Complexity, Skewness, Portfolio Selection, Naive Diversification

JEL Classification: D81