Consumption Thresholds Risk Attitude and Non-Monotonic Complexity of the Consumer Problem

We present a model that adapts the standard consumer choice model by assuming that some consumption categories or goods (e.g., car ownership) have minimal expenditure thresholds. Our model provides novel explanations for two puzzles related to risk attitude: (1) why people buy both insurance and lottery tickets, and (2) why the lottery’s skewness affects the risk attitude, and, in particular, why it does so in opposite directions for gains and losses. We also show that the tendency of people to invest in lotteries with a small probability for a high gain (Lotto) is decreasing in their wealth level.  Furthermore, we show that under certain conditions, our model predicts a change of risk attitude (which happens more than one time) as a function of a payoff (either for loss or gain). This is a novel explanation for such phenomenon, which cannot be achieved using the well-known prospect theory. We also show that the complexity of the consumer problem is non-monotonic increasing in wealth. This result suggests that people of moderate wealth may deviate from utility maximization (due to complexity costs) more than either poor or rich people.