Tradeoffs and Comparison Complexity

Abstract

Using theory and experiments, this paper shows that the difficulty of making tradeoffs offers a parsimonious explanation for a wide range of behavioral phenomena. We develop a model of imprecise comparisons applicable to multiattribute, lottery, and intertemporal choice, which formalizes the idea that comparisons are difficult when they involve pronounced tradeoffs. Our model rationalizes a range of documented regularities, such as context effects, preference reversals, apparent probability weighting and hyperbolic discounting, and generates novel implications for behavior. We assess the explanatory power of our model in a series of choice experiments. Our model explains a large share of the variation in choice inconsistency across problems, and we document that manipulating tradeoffs reverses classic behavioral regularities, in line with its predictions.