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On Preference for Flexibility and Complexity Aversion: Experimental Evidence 1

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  • Doron Sonsino

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  • Marvin Mandelbaum
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    Abstract

    Desire for flexibility suggests that the value of a choice-menu should increase with the number of options included. Complexity-aversion on the other hand may imply that the value of a menu decreases with its cardinality. We present the results of an experiment where 5 groups of subjects were asked to evaluate saving plans that let the investor choose between alternative indexing-schemes before the saving period ends. The complexity of the different plans was manipulated in two ways: (1) increasing the number of indexing options; (2) reducing the quality of information upon which the choice between different indices is made. We show that an increase in the number of indexing-options produces a negative complexity effect when the quality of information is high. The same change however results in a positive flexibility effect when the quality of information is low. More generally our results suggest a `negative cross interaction of complexity effects' and that the impact of complexity is marginally decreasing. We discuss possible cognitive explanations to the observed evaluation-patterns. Copyright Kluwer Academic Publishers 2001

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    File URL: http://hdl.handle.net/10.1023/A:1015555026870
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    Bibliographic Info

    Article provided by Springer in its journal Theory and Decision.

    Volume (Year): 51 (2001)
    Issue (Month): 2 (December)
    Pages: 197-216

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    Handle: RePEc:kap:theord:v:51:y:2001:i:2:p:197-216

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    Web page: http://www.springerlink.com/link.asp?id=100341

    Related research

    Keywords: Rationality; Menu-dependence; Information; Flexibility; Complexity;

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    1. Huck, Steffen & Weizsacker, Georg, 1999. "Risk, complexity, and deviations from expected-value maximization: Results of a lottery choice experiment," Journal of Economic Psychology, Elsevier, vol. 20(6), pages 699-715, December.
    2. Drazen Prelec & George Loewenstein, 1991. "Decision Making Over Time and Under Uncertainty: A Common Approach," Management Science, INFORMS, vol. 37(7), pages 770-786, July.
    3. Werner Güth, 2000. "Boundedly Rational Decision Emergence - A General Perspective and Some Selective Illustrations," CESifo Working Paper Series 330, CESifo Group Munich.
    4. Kreps, David M, 1979. "A Representation Theorem for "Preference for Flexibility"," Econometrica, Econometric Society, vol. 47(3), pages 565-77, May.
    5. Guth, Werner, 2000. "Boundedly rational decision emergence - a general perspective and some selective illustrations," Journal of Economic Psychology, Elsevier, vol. 21(4), pages 433-458, August.
    6. Shin, Kwanho, 1999. "Fluctuating uncertainty and flexibility value," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(3), pages 329-340.
    7. Ulrich Schmidt, 2001. "Lottery Dependent Utility: a Reexamination," Theory and Decision, Springer, vol. 50(1), pages 35-58, February.
    8. Mandelbaum, Marvin & Buzacott, John, 1990. "Flexibility and decision making," European Journal of Operational Research, Elsevier, vol. 44(1), pages 17-27, January.
    9. Martin Shubik, 1998. "Game Theory, Complexity and Simplicity. Part III: Critique and Prospective," Cowles Foundation Discussion Papers 1184, Cowles Foundation for Research in Economics, Yale University.
    10. Ben-Porath Elchanan, 1993. "Repeated Games with Finite Automata," Journal of Economic Theory, Elsevier, vol. 59(1), pages 17-32, February.
    11. Tjalling C. Koopmans, 1962. "On Flexibility of Future Preference," Cowles Foundation Discussion Papers 150, Cowles Foundation for Research in Economics, Yale University.
    12. Mador, Galit & Sonsino, Doron & Benzion, Uri, 2000. "On complexity and lotteries' evaluation - three experimental observations," Journal of Economic Psychology, Elsevier, vol. 21(6), pages 625-637, December.
    13. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
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