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Heterogeneity in Preferences towards Complexity

Lookup NU author(s): Professor Daniel ZizzoORCiD

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Abstract

We analyze lottery-choice data in a way that separately estimates the effects of risk aversion and complexity aversion. Complexity is represented by the number of different outcomes in the lottery. A finite mixture random effects model is estimated which assumes that a proportion of the population are complexity-neutral. We find that around 33% of the population are complexity-neutral, around 50% complexity-averse, and the remaining 17% are complexity-loving. Subjects who do react to complexity appear to have a bias towards complexity aversion at the start of the experiment, but complexity aversion reduces with experience, to the extent that the average subject is (almost) complexity neutral by the end of the experiment. Complexity aversion is found to increase with age and to be higher for non-UK students than for UK students. We also find some evidence that, when evaluating complex lotteries, subjects perceive probabilities in accordance with Prospective Reference Theory.

Publication metadata

Author(s): Moffatt P, Sitzia S, Zizzo DJ

Publication type: Article

Publication status: Published

Journal: Journal of Risk and Uncertainty

Year: 2015

Volume: 51

Issue: 2

Pages: 147-170

Print publication date: 01/10/2015

Online publication date: 13/11/2015

Acceptance date: 21/08/2015

Date deposited: 22/11/2015

ISSN (print): 0895-5646

ISSN (electronic): 1573-0476

Publisher: Springer

URL: http://dx.doi.org/10.1007/s11166-015-9226-3

DOI: 10.1007/s11166-015-9226-3

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