Abstract: We present experimental evidence suggesting that human subjects dislike complexity in choice with uncertainty. Our results suggest that the probability of choosing a given alternative decreases with the relative complexity of that alternative. Complexity increases the noise in the choice process and the chances that the (otherwise) inferior alternative will be selected. Our results contradict the predictions of (discounted) expected utility theory and intuitively appealing axioms like ‘stochastic dominance’ and ‘convexity’. These ‘complexity effects’ may lead to inefficient portfolio selection. The perceived complexity of a given lottery may depend on editing procedures and be subjected to framing effects. The flourishing experimental research on individual choice over the last two decades has produced a list of anomalies suggesting that human agents’ behaviour is frequently incompatible with the formal models traditionally employed in the economic literature. 1 Some of these anomalies – eg the certainty effect of Kahneman and Tversky (1979) – have demonstrated that individual behaviour is inconsistent with the von Neumann Morgenstern Expected Utility theory. Alternative models like Prospect Theory (Kahneman and Tversky, 1979), Anticipated Utility (Quiggin, 1982) and many others have been suggested to resolve the contradictions. Other anomalies – eg, the evidence on hyperbolic discounting presented by Thaler (1981) – have referred to the case of intertemporal choice and suggested that human subjects do not comply with Samuelson’s Discounted Utility model. Again, attempts have been made to develop alternative models that reconcile the inconsistencies; see, for example, Loewenstein and Prelec (1992). This paper concentrates on a different anomaly that seems inconsistent with the evaluation models that are typically assumed in the economic literature. The basic ‘simple’ idea is that human subjects are inclined to avoid ‘complicated’ lotteries. Accordingly, they sometimes discriminate against complicated lotteries and prefer simple lotteries to complicated ones in cases where the value of the complicated lottery should be higher. In particular, we demonstrate that complexity affects choice in two ways: 1 The probability of choosing a given alternative (in binary choice tasks) decreases with the relative complexity of that alternative. 2 The noise in the choice process increases with complexity and thus the chances that the (otherwise) inferior alternative will be selected, increase as well.

Abstract: This paper deals with the optimal allocation of risks for an agent whose preferences may be represented with prospect theory (Tversky and Kahneman, 1992) A simple setting is considered with an identically distributed and symmetric sources of risk Under expected utility, equal diversification of risks is optimal in this setting ("do not put your eggs in the same basket") Conversely, under prospect theory, provided that the subjective probability of obtaining a perfect hedge is negligible, risk concentration is optimal ("do put your eggs in the same basket") The intuitive reason behind this result is that a prospect theory agent is risk-seeking over losses, with the consequence that the property of diversification of averaging downside risks is welfare-reducing rather than welfare-improving

Abstract: The assessment of risk and its relationship with expected returns is a central concern of strategic management and has been extensively researched (McNamara and Bromiley, 1999; Sitkin and Pablo, 1992) There has been increasing recognition that the subject of risk is inherently more complex than previously thought, incorporating literature from seemingly disparate fields The streams we examine in this article to reconstruct the determinants of risk-taking are prospect theory (Kahneman and Tversky, 1979; Tversky and Kahneman, 1981, 1986), behavioral theory (Cyert and March, 1963; March, 1994), and theories of social cognition (Lewicka, 1997) In the next few paragraphs, we briefly examine prospect theory and behavioral theory The theories of social cognition are discussed in more detail in a later part of the article Prospect Theory Our first approach to understanding managerial risk-taking is the perspective provided by prospect theory which is in sharp contrast to the position taken by agency theory Agency theory, rooted in financial economics, is based on assumptions of rational behavior and economic utilitarianism (Ross, 1973), and posits a linear positive relationship between risk and return The work of Kahneman and Tversky (1979), however, presented a nonlinear and, in part, negative relationship between risk and return Kahneman and Tversky (1979) showed that people's understanding of and relationship with risk could be better explained by "prospect theory" This theory suggests that the way a situation is framed will determine individual risk perception and risk behavior Prospect theory suggests that in the case of gains people outweigh outcomes that are certain compared to outcomes that are probable However, in the case of losses, people outweigh outcomes that are probable compared to Outcomes that are certain In other word s, people prefer sure gains to likely gains, and they also prefer likely losses to sure losses Prospect theory suggests that individuals prefer to protect prior gains and are, consequently, risk-averse This is in contrast to failures, when past failures tend to make individuals risk-seeking It should be noted, however, that there are some theoretical approaches and empirical findings that are at variance with prospect theory in that past success increases the willingness to take risks (Osborn and Jackson, 1988; Thaler and Johnson, 1990), or that past failures lead to rigidity and risk-averse behavior (Staw et al, 1981) The framing of problems, a central finding in the area of managerial cognition and decision making (Kahneman and Tversky, 1979; Williams and Voon, 1999), in turn, leads to a variety of risk-related behaviors by managers and should be contrasted by the outcomes provided in agency theory Agency theory makes normative assumptions about agents' choice of behavior, which are based on rational expectations and utility maximization In short, agency theory assumes consistent choice behavior across a variety of differently framed problems, and does not consider the important role of problem framing However, prospect theory predicts that individuals exhibit risk-averse preferences when selecting from positively framed prospects, and they exhibit risk- seeking preferences when selecting from negatively framed prospects (Kahneman and Tversky, 1979; Wiseman and Gomez-Mejia, 1998) Behavioral Theory Wiseman and Bromiley (1996), in examining the behavioral theory of the firm (Cyert and March, 1963; March, 1994), suggest that a number of contextual variables are integral to the decision-making process These contextual variables include (1) performance (or indicators of internal and comparative performance), (2) organizational resources (or slack, measured as the difference between the minimum resources required to produce a given level of output and some higher level actually observed), (3) aspirations and expectations (hoped-for and actual levels of accomplishment), (4) income stream variability or risk, and (5) organizational size …

Abstract: This article outlines a theoretical framework that distinguishes three forms of responsiveness to legal sanction threats: acute conformist, deterrable, and incorrigible. It then investigates the implications of the framework with data from a perceptual deterrence survey administered to 412 university students. The findings suggest the preeminent empirical regularity in deterrence research—that the deterrent effect of the certainty of punishment far exceeds that of the severity of punishment—may be overstated. An analysis confined to deterrable offenders suggests that the severity effect (relative to the certainty effect) may exceed that reported in extant research.