Complexity and Sophistication.

General Information

Complexity and Sophistication.
Leandro Carvalho and Dan Silverman.
Publication Type
Working paper
National Bureau of Economic Research
Many financial situations present individuals with simple alternatives to solving complex problems. Are individuals sophisticated; do they know when they are better off opting out of complexity? We tested complexity's effects and evaluated sophistication in a large and diverse sample. We randomly assigned both complexity to portfolio problems and the offer of a simple alternative to portfolio choice. The less skilled opt out more often under complexity and thus earn lower returns, often from dominated choices. Estimated with a novel identification strategy, the structural parameters of a rational inattention model are, nevertheless, consistent with substantial sophistication. Substantial fractions of the money lost by opting out can be justified by attention cost savings