Template-type: ReDIF-Paper 1.0
Author-Name: Michael P. Keane
Author-Workplace-Name: University of Oxford and University of South Wales
Author-Email: michael.keane@economics.ox.ac.uk
Author-Name: Susan Thorp
Author-Workplace-Name: The University of Sydney
Author-Email: susan.thorp@sydney.edu.au
Title: Complex Decision Making: The Roles of Cognitive Limitations, Cognitive Decline and Ageing
Abstract: We review evidence on decision making in complex choice situations – i.e., situations where
there are many alternatives and/or where attributes of alternatives are difficult to understand.
We focus on choices about health insurance, health care, and retirement planning, all of
which are very important for the well-being of the elderly. Our review suggests that
consumers in general, and the elderly in particular, have great difficulty making optimal
choices in these areas. They often behave in ways that imply a high degree of “confusion,”
such as (i) failure to understand key attributes of alternatives, or (ii) inadequate cognitive
capacity to process payoff relevant information. We go on to discuss extensions to standard
rational choice models that account for consumer confusion. These include allowing
perceived attributes to depart from true attributes; the use of heuristics; and inattention or
procrastination. Such departures from rationality can be moderated by cognitive ability, age
etc. We hope that these new models may be useful in designing paternalistic interventions. 
Classification-JEL: I13; I11; J14; J32; H55; D14; D83; D84; D91; C35
Keywords: Aging; Life cycle; Health insurance; Health care; Pensions; Retirement plans; Discrete choice models
Length: 71 pages
Creation-Date: 2016-11-01
Number: 2016-W10
File-URL: https://www.nuffield.ox.ac.uk/economics/papers/2016/Keane_Thorp_Revised_Final_1.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1610