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American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Decisions under Risk Are Decisions under Complexity

  • Ryan Oprea
American Economic Review
vol. 114, no. 12, December 2024
(pp. 3789–3811)
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Abstract

We provide evidence that classic lottery anomalies like probability weighting and loss aversion are not special phenomena of risk. They also arise (and often with equal strength) when subjects evaluate deterministic, positive monetary payments that have been disaggregated to resemble lotteries. Thus, we find, e.g., apparent probability weighting in settings without probabilities and loss aversion in settings without scope for loss. Across subjects, anomalies in these deterministic tasks strongly predict the same anomalies in lotteries. These findings suggest that much of the behavior motivating our most important behavioral theories of risk derive from complexity-driven mistakes rather than true risk preferences.

Citation

Oprea, Ryan. 2024. "Decisions under Risk Are Decisions under Complexity." American Economic Review, 114 (12): 3789–3811. DOI: 10.1257/aer.20221227

Additional Materials

JEL Classification

  • C91 Design of Experiments: Laboratory, Individual
  • D44 Auctions
  • D81 Criteria for Decision-Making under Risk and Uncertainty
  • D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making