Sunday, November 21, 2004

The Paradox of Choice

Barry Schwartz's The Paradox of Choice argued that when we have more choices of consumer items, it can actually lead to less satisfaction. From one review:
Research in the wake of Kahneman and Tversky has unearthed a number of conundrums around choice. For one thing, choice can be “de-motivating.” In a study conducted several years ago, shoppers who were offered free samples of six different jams were more likely to buy one than shoppers who were offered free samples of twenty-four. This result seems irrational—surely you’re more apt to find something you like from a range four times as large—but it can be replicated in a variety of contexts. Students who are offered six topics they can write about for extra credit, for instance, are more likely to write a paper than students who are offered thirty.

Why should this be? Schwartz suggests that it has to do with the irrational way people measure “opportunity costs.” Instead of calculating opportunity cost as the value of the single most attractive foregone alternative, we seem to assemble an idealistic composite of all the options foregone. A wider range of slightly inferior options, then, can make it harder to settle on one you’re happy with. Similarly, when people direct their wants toward “classes” of goals, they tend to figure they’ll get a better-than-average example of the class. When a person says, “I feel like a plate of spaghetti,” he envisions a particularly good plate of spaghetti. And, as the psychologists Daniel Gilbert, of Harvard, and Timothy Wilson, of the University of Virginia, have observed, “If it is difficult to know whether we will be happy fifteen minutes after eating a bite of spaghetti, it is all the more difficult to know whether we will be happy fifteen months after a divorce or fifteen years after a marriage.”

There are even cases, as Schwartz notes, where just one additional choice can produce outright paralysis. Tversky and the young Princeton psychologist Eldar Shafir asked experimental subjects how they would react to a desirable Sony appliance placed in a shopwindow, radically marked down. The offer met with predictable enthusiasm. When a second appliance, similarly marked down, was placed alongside the bargain Sony, enthusiasm—and sales—dropped. Some hypothetical customers were evidently frozen by indecision.
This hasn't been mentioned in any reviews of the book (so far as I can tell), but Schwartz's thesis strikes me as a perfectly obvious and straightforward implication of the reasoning that Ronald Coase used when formulating his famous theorem. When more choices are added to the mix, transaction costs rise. (That is, when there are more choices, you have to gather more information -- a transaction cost.) And when there are higher transaction costs, there are fewer transactions.

2 Comments:

Blogger Matt Scofield said...

I wonder if the difference in each consumer's assessment of the transaction cost (taking in all the information) is predicated on their IQ, or if factors like "they're in a hurry" override that. After all, buying jam or a discounted appliance isn't that big of a decision, so perhaps personality (of both the seller & buyer) has more to do with it than anything.

11:37 AM  
Blogger Al Nye said...

Perhaps this explains why with 265 channels to watch on cable, I still can't find anything good?

Al Nye

9:06 PM  

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