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 choice under risk. Consistent with our model, we find that complexity affects behavior only in the absence of a salient cue. Additional evidence on response times and memory supports our salience-based explanation. Our results can have important implications for how to design (information) policies that help consumers navigate complex decisions.

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

JEL Classification: D81