Salient Cues and Complexity

82 Pages Posted: 12 Nov 2020 Last revised: 5 Dec 2020

See all articles by Markus Dertwinkel-Kalt

Markus Dertwinkel-Kalt

Frankfurt School of Finance & Management

Mats Köster

Central European University (CEU)

Date Written: December 4, 2020

Abstract

Economic decisions are often influenced by "salient cues" that stand out in the choice context and attract attention. Intuitively, through channeling attention to a subset of the relevant information, salience thereby reduces the "dimensionality" of a decision problem. Building on this intuition, we hypothesize that people behave more consistently across differently complex problems if there is a common salient cue that guides their attention and, consequently, behavior. We experimentally test and confirm this hypothesis in the context of choice under risk: while 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. To rationalize our experimental results, we propose a variant of Bordalo et al.'s (2012) salience theory.

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

JEL Classification: D81

Suggested Citation

Dertwinkel-Kalt, Markus and Köster, Mats, Salient Cues and Complexity (December 4, 2020). Available at SSRN: https://ssrn.com/abstract=3697313 or http://dx.doi.org/10.2139/ssrn.3697313

Markus Dertwinkel-Kalt

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

Mats Köster (Contact Author)

Central European University (CEU) ( email )

Quellenstraße 51
Vienna
Austria

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