Tradeoffs and Comparison Complexity

Abstract: This paper develops a theory of how tradeoffs govern comparison complexity, and how this complexity generates systematic mistakes in choice. In our model, options are easier to compare when they involve less pronounced tradeoffs, in particular when they are 1) more similar feature-by-feature and 2) closer to dominance. These two postulates yield tractable measures of comparison complexity in the domains of multiattribute, lottery, and intertemporal choice. We show how our model organizes a range of behavioral regularities in choice and valuation, such as context effects, preference reversals, and apparent probability weighting and hyperbolic discounting. We test our model experimentally by varying the strength and nature of tradeoffs. First, we show that our complexity measures predict choice errors, choice inconsistency, and cognitive uncertainty in binary choice data across all three domains. Second, we document that manipulations of comparison complexity can reverse classic behavioral regularities, in line with the predictions of the theory. We apply our theory to study strategic obfuscation by firms in a pricing game.