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Complexity and Narrow Bracketing in Credit Choice

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  • Kalaycı, Kenan
  • Serra-Garcia, Marta

Abstract

We examine experimentally the effect of complexity on individual decision making. We focus on credit choices, as they have been widely criticized for their complexity in recent years. In a first study, we find that complexity in benefits leads to random mistakes, while complexity in costs leads to a specific mistake: choosing a high-benefit loan, with very costly repayment schemes. In a second study, we show that individuals still (mistakenly) choose the high-benefit loan, even if cheaper and simple loans are available. This suggests that, when costs are complex, individuals bracket narrowly, focus on benefits and ignore costs, while they do not when benefits are complex. Hence, our results show that complexity and narrow bracketing may be deeply intertwined: complexity that makes narrow bracketing cognitively easier is likely to lead to myopic choices, such as choosing complex and expensive loans, despite the presence of simple and cheaper loans.

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File URL: http://epub.ub.uni-muenchen.de/13035/1/Kalayci%2C%20SerraGarcia%20%282012%29%20Complexity%20and%20Narrow%20Bracketing%20in%20Credit%20Choice.pdf
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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 13035.

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Date of creation: May 2012
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Handle: RePEc:lmu:muenec:13035

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Keywords: Complexity; Credit; Mistakes; Narrow Bracketing;

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Cited by:
  1. Abeler, Johannes & Jäger, Simon, 2013. "Complex Tax Incentives: An Experimental Investigation," IZA Discussion Papers 7373, Institute for the Study of Labor (IZA).

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