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 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 upside nor downside. Absent a salient cue, subjects diversify naively. Evidence on response times and memory supports our salience-based explanation. This paper was accepted by Ilia Tsetlin, behavioral economics and decision analysis. Funding: Financial support by the German Research Foundation ([Grant 404416232] for M. Dertwinkel-Kalt and [Grant 235577387/GRK1974] for M. Köster) is gratefully acknowledged. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.00652 .