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Complexity and its Consequences

Paper Session

Sunday, Jan. 4, 2026 10:15 AM - 12:15 PM (EST)

Philadelphia Convention Center, 308
Hosted By: American Economic Association
  • Chair: Alex Rees-Jones, University of Pennsylvania

The Complexity of Economic Decisions

Xavier Gabaix
,
Harvard University
Thomas Graeber
,
Harvard University

Abstract

We propose a theory of the complexity of economic decisions. Leveraging a macroeconomic framework of production functions, we conceptualize the mind as a cognitive economy, where a task’s complexity is determined by its composition of cognitive operations. Complexity emerges as the inverse of the total factor productivity of thinking about a task. It increases in the number of importance-weighted components and decreases in the degree to which the effect of one or few components on the optimal action dominates. Higher complexity generates larger decision errors and behavioral attenuation to variation in problem parameters. The model applies both to continuous and discrete choice. We develop a theory-guided experimental methodology for measuring subjective perceptions of complexity that is simple and portable. A series of experiments test and confirm the central predictions of our model for perceptions of complexity, behavioral attenuation, and decision errors. We provide a template for applying the framework to core economic decision domains, and then develop several applications including the complexity of static consumption choice with one or several interacting goods, consumption over time, the tax system, forecasting, and discrete choice between goods.

Beyond Instrumental Value: How Complexity Shapes Information Demand

Menglong Guan
,
Pennsylvania State University
Ryan Oprea
,
University of California-Santa Barbara
Sevgi Yuksel
,
New York University

Abstract

We experimentally investigate how features of information structures beyond their instrumental value influence information demand. Using novel methods that minimize Bayesian reasoning errors, we find that while participants strongly favor structures with higher instrumental value, they systematically deviate from optimal choices in predictable ways. We identify key structure features that drive these deviations and show that they are as predictive of behavior as individual characteristics, with stronger effects among participants who are otherwise more likely to act optimally and those who are ambiguity averse. Our findings suggest that these distortions stem from the cognitive complexity of evaluating information structures, with implications for models of information demand and the design of effective disclosure strategies.

Caution in the Face of Complexity

Geoffroy de Clippel
,
Brown University
Paola Moscariello
,
Princeton University
Pietro Ortoleva
,
Princeton University
Kareen Rozen
,
Brown University

Abstract

We show experimentally that people undervalue options they find complex. We document this phenomenon for tasks as diverse as belief updating, visual perception, and compound risk. This behavior is incompatible with Expected Utility, even when accounting for risk aversion and incorrect beliefs; instead, it suggests people dislike the cognitive uncertainty they experience in the face of complexity in a way reminiscent of ambiguity aversion. The data supports this explanation: our effects increase when both cognitive uncertainty and ambiguity aversion increase. We also find corroborating evidence when revisiting Enke and Graeber (2023)'s data: in addition to attenuated responses, cognitive uncertainty also lowers how much subjects value lotteries. At a broad level, our results suggest that individual preferences toward complexity matter in cognitive models. At a narrower level, our paper informs the literature on non-Bayesian updating, which overlooks complexity aversion, and the connection between compound lottery and ambiguity aversion, which, we show, holds primarily for subjects who find compound lotteries complex.

A Direct Examination of Preferences for Wealth Integration

Ryan Oprea
,
University of California-Santa Barbara
Alex Rees-Jones
,
University of Pennsylvania
Alexander Whitefield
,
University of Pennsylvania

Abstract

In economic models, individuals’ risk preferences are typically governed by their preferences over final wealth states. Many scholars have questioned the descriptive validity of this assumption and have indirectly attacked it by posing successful alternative models that do not require it. In this study, we provide a direct assessment of individuals’ preferences for wealth integration. We document that subjects overwhelmingly prefer when gambles are preferred in terms of immediate payoff consequences rather than in terms of integrated final wealth. Using this data, we examine the role of several hypothesized deterrents to wealth integration. Our results point to an important role of aversion to complex comparisons. We use these findings to motivate a discussion of the most valuable features of behavioral economic models that extend the expected-utility framework for understanding decision under risk.
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • D9 - Micro-Based Behavioral Economics