Complex Decision Making

We review the evidence on decision making in complex choice situations—i.e., situations where there are many alternatives and/or where attributes of alternatives are difficult to understand. We focus on choices about health insurance, health care, and retirement planning, all of which are very important for the well-being of the elderly. Our review suggests that consumers in general, and the elderly in particular, have great difficulty making optimal choices in these areas. They often behave in ways that imply a high degree of “confusion,” such as (i) failure to understand key attributes of alternatives or (ii) inadequate cognitive capacity to process payoff relevant information. We go on to discuss extensions to standard rational choice models that account for consumer confusion. These include allowing perceived attributes to depart from true attributes, the use of heuristics, and inattention or procrastination. Such departures from rationality can be moderated by cognitive ability, age, etc. We hope that these new models may be useful in designing paternalistic interventions.