Collaborative Research: The Value of Complex Alternatives

About This Grant

This research investigates the implications of complexity on value and its underlying causes. In everyday life, people often face decisions involving complex options, such as lengthy insurance contracts or intricate investment opportunities. It is important to know how people value these complex options and whether the presence of complexity affects the value people give. Understanding how complexity influences valuation is critical to understanding decision-making and markets. This research shows, first, that people undervalue options that they deem particularly complex, which depends on i) how complex they deem the alternative at hand and ii) how they react to uncertainty in general. Second, this research studies whether a cautious reaction to complexity is also at play in many strategic interactions, that is, situations when what one obtains also depends on what other people do. Third, this research develops mathematical models that are useful to study this behavior. By increasing understanding of when and how aversion to complexity applies, this research informs decision making to avoid complexity-related pitfalls. This research comprises large-scale economic experiments and a theoretical project. The first set of experiments studies the valuation of complex bets in decision-making settings, including bets involving belief-updating, visual perception, and compound lotteries. These aim to show that the values assigned to bets are incompatible with standard theory, even accounting for risk aversion and biased beliefs. Instead, complexity generates cognitive uncertainty, and this uncertainty is treated like a source of ambiguity: undervaluation increases when both cognitive uncertainty and ambiguity aversion increase. The second set of experiments extends these ideas to strategic interactions. The standard assumption in game theory is that individuals perfectly process any complex aspect of a game or the behavior of other players and assign to games a value corresponding to their equilibrium value. The research investigates whether, instead, individuals are averse to the complexity of games and may undervalue them. The final theoretical portion of this research develops a model of caution in the face of complexity and uses it to derive an endogenous notion of revealed complexity. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.