Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104364
Authors: 
Kalaycı, Kenan
Serra-Garcia, Marta
Year of Publication: 
2012
Series/Report no.: 
Munich Discussion Paper 2012-16
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.
Subjects: 
Complexity
Credit
Mistakes
Narrow Bracketing
JEL: 
C91
D03
D14
G02
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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