Salient Cues and Complexity

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See all articles by Markus Dertwinkel-Kalt

Markus Dertwinkel-Kalt

Frankfurt School of Finance & Management

Mats Köster

Heinrich Heine University Dusseldorf

Date Written: September 22, 2020

Abstract

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

Dertwinkel-Kalt, Markus and Köster, Mats, Salient Cues and Complexity (September 22, 2020). Available at SSRN: https://ssrn.com/abstract=

Markus Dertwinkel-Kalt

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

Mats Köster (Contact Author)

Heinrich Heine University Dusseldorf ( email )

Universitätsstrasse 1
Duesseldorf, DE NRW 40225
Germany

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