Decomposing the Cost of Complexity Under Risk

Xiaoge Dong; Lasse Mononen

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arXiv · 2611.09381

Decomposing the Cost of Complexity Under Risk

Xiaoge Dong·Lasse Mononen

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Abstract

We study preferences under risk when the probability structure of a lottery can affect value separately from its final prizes. Our first result characterizes perturbed expected utility representation in which lottery value separates into expected utility over prizes and an additive perturbation term depending only on the probability tree. The key behavioral restrictions are branch cancellation, which separates prize evaluation from probability structure, and within-tree dominance, which captures that evaluations within the same probability tree are simple and follow dominance. Strengthening branch cancellation to lottery cancellation, which extends the invariance requirement from common prizes to common sublotteries, characterizes additive separability of the perturbation across branches. We also characterize when the tree dependent perturbation term depends only on the number of distinct possible prizes: under weaker continuity requirements, adding same-support independence yields a support size representation for nondegenerate lotteries, and a certainty equivalent condition extends it to degenerate lotteries. Finally, concavity gives the perturbation term its interpretation as a complexity cost.

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Xiaoge Dong, Lasse Mononen. 2026-11-06. Decomposing the Cost of Complexity Under Risk. https://arxiv.org/abs/2611.09381

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