DECISION-MAKING WHEN CHOICES ARE COMPLEX - A TEST OF HEINERS HYPOTHESIS

This paper explores Heiner's hypothesis concerning a gap between the cognitive ability of decision makers and the difficulty of decisions (the C-D gap). We discuss the implications of decision heuristics for coefficient estimates when uncertainty is faced by decision makers, where the level of uncertainty varies with complexity. Statistical analysis strongly supports the presence of a C-D gap and provides evidence supporting the use of decision heuristics. The results of both direct and indirect methods suggest that mired decision strategies may be used. We also find that complexity effects can have important implications for welfare analysis. (JEL Q20)