Salient Cues and Complexity
79 Pages Posted:
Date Written: September 22, 2020
Building on the growing literature on salience effects, we hypothesize that people behave consistently across problems of varying complexity if there is a common "salient cue" that guides their behavior in the same direction, but not necessarily if such a cue is missing. We conducted a laboratory experiment to test this hypothesis in the domain of choice under risk by varying complexity along two dimensions: the computational effort necessary to determine the consequences of an option, and the number of options to be evaluated and compared. Our main experimental result identifies an interaction between the complexity of the choice problem and the skewness of the available options: while the revealed attitudes toward skewed risks, which have extreme and salient outcomes, are consistent across differently complex problems, revealed attitudes toward symmetric risks, where such a salient cue is missing, vary significantly with complexity. We provide suggestive evidence that these findings are driven by the extreme outcomes of skewed risks attracting a subject’s attention and guiding choices. In sum, our experimental findings indicate that absent a salient cue complexity can fundamentally change the way in which people approach a problem and eventually reach a decision. Based on the available evidence, we propose a variant of Bordalo et al.'s (2012) salience theory that rationalizes all experimental results.
Keywords: Salience, Complexity, Skewness, Portfolio Selection, (Naive) Diversification
JEL Classification: D81
Suggested Citation: Suggested Citation