Salient Cues and Complexity

71 Pages Posted: 12 Nov 2020 Last revised: 30 Oct 2023

See all articles by Markus Dertwinkel-Kalt

Markus Dertwinkel-Kalt

University of Münster; Max Planck Institute for Research on Collective Goods

Mats Köster

Central European University (CEU)

Date Written: October 28, 2023

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

Suggested Citation

Dertwinkel-Kalt, Markus and Köster, Mats, Salient Cues and Complexity (October 28, 2023). Available at SSRN: https://ssrn.com/abstract=3697313 or http://dx.doi.org/10.2139/ssrn.3697313

Markus Dertwinkel-Kalt

University of Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Mats Köster (Contact Author)

Central European University (CEU) ( email )

Quellenstraße 51
Vienna
Austria

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