Behavioral, Econometrics and Theory Seminar Series Presents: Jacopo Magnani
December 4 @ 1:40 pm
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Economics Behavioral, Econometrics, & Theory Seminar
Date: Thursday, December 4, 2025
Time: 1:40-3:00 p.m.
Location: E2-499
Speaker: Jacopo Magnani
Title: Associate Professor of Economics
Affiliation: Norwegian University of Science and Technology, visiting Caltech
Host: Kristian Lopez Vargas
Seminar title: Behavioral Limits to Complete Markets
ABSTRACT: Standard economic theory predicts that individuals should prefer complete markets to incomplete markets, as the former allow state-contingent claims for every possible outcome. Yet real-world markets remain incomplete, and the demand-side origins of the phenomenon are poorly understood. We develop an experimental framework to examine whether investors may themselves prefer incomplete markets, and highlight two potential mechanisms: preference instability, which exposes agents to greater regret or temptation in complete markets, and complexity costs, which arise because higher dimensionality increases cognitive effort and errors. In our experiment, participants consistently reveal a preference for in complete markets, contradicting the rational benchmark. Comparing homegrown and induced-preference treatments, we find no evidence that this behavior is driven by preference instability. Instead, utility losses, response times, and subjective ratings indicate that complexity costs drive the preference for incompleteness. Structural estimation confirms that complete markets are several times more complex than incomplete ones, providing a behavioral foundation for market incompleteness.
