BE101x: Choice Overload

DEALING WITH CHOICE COMPLEXITY

By Dilip Soman

In most western societies, the concept of choice -- and the ability to exercise it -- is seen as fundamental to people’s sense of autonomy and well being. As a result of the ‘choice is good’ thinking, the number of offerings in a wide variety of product and service categories has increased significantly over time. Compared to just 10 years ago, the range of products available in a typical North American supermarket has increased by 55 per cent. Assortment sizes in almost every product category have gone up. In an informal study, my colleagues and I went to several drugstores to count how many different unique types of pain and fever medications were available and found that the number ranged from 55 to 211 varieties.

Food for Thought

The example of headache medications is not an isolated one. A number of popular writers and academic researchers have recently written extensively about the negative effects of choice. In an earlier issue of Rotman magazine, Harvard Business School’s John Gourville and I reported the results of several experiments on what we called ‘Overchoice’. In essence, we found that under some conditions, offering people additional choices creates confusion and cognitive overload. As a result, we found that people were more likely to switch to brands that offered a small number of branded variants because it was easier to choose within that smaller set.

There are a number of other recent demonstrations. Perhaps the most famous was by Columbia University’s Sheena Iyengar and Ross Lepper, who conducted an experiment in a supermarket where they set up tasting tables for jams. They found that when shoppers are given the option of choosing among smaller and larger assortments of jam, they show more interest in the larger assortment. But when it comes time to pick just one, they are 10 times more likely to make a purchase if they choose among six rather than among 24 flavors of jam.

In another example, I was once asked by the owner of a Chinese take-out restaurant a question that he found very puzzling. He showed me his menu, which had 155 different items listed but then bemoaned that, “about 80 per cent of my sales come from only five or six of these items.” Relatedly, new patrons of coffee shops like Starbucks often report feeling overwhelmed by the menu board and end up choosing only regular coffee.

In many situations, choice overload can also be worsened by information overload. Think about the information that an average individual investor sees when they are choosing which stock to invest in; or the innumerable track record details available to an individual who wants to place a bet on a race horse. Further, some situations are inherently more stressful and are associated with negative emotions (for instance, deciding between surgery and therapy for a serious medical condition), and that alone can increase the complexity associated with the choice.

From Inconsequential to Consequential Decisions

While researchers in Behavioural Economics have been building up evidence on the negative effects of choice, critics have argued that these studies have only been done in relatively inconsequential domains (like the aforementioned jams and restaurant menu studies). Perhaps if the decision was really important and consequential, people would be more likely to benefit from additional choice.

It turns out that this is not the case, and two sets of evidence stand out in this regard. The first is a study by the University of Chicago’s Henrik Cronqvist and Richard Thaler on the Swedish social security system. This plan introduced by the Swedish government at the turn of the century allowed participants to form their own portfolios by selecting up to five funds from an approved list. Funds were allowed to advertise themselves and to determine their own fee structure, individuals were encouraged to make their own choices, and any fund meeting certain fiduciary requirements was allowed to enter the market. In the end, individuals had a list of 456 approved funds from which they could choose. Free entry, unfettered competition and the right of individuals to choose were all consistent with the principle of libertarianism and freedom of choice. However, the researchers found that participants consistently made sub-optimal choices, and that they tended to choose default options. Further, their analysis revealed that people who made active choices for themselves did not necessarily end up with portfolios that did very well.

A second piece of evidence comes from research by Columbia’s Sheena Iyengar and Wei Jiang, who analyzed retirement-fund choices ranging from packages of two to 59 choices among more than 800,000 employees at 647 companies. The so-called 401(k) plans give people incentives to participate through tax shelters and employer matches. A thoughtful economic analysis on the part of individuals should suggest that the option of participating in these plans dominates the option of not-participating. However, Iyengar and Jiang found that more options led people to act like the jam buyers: when given two choices, 75 percent participated in a 401(k) plan, but when given 59 choices, only 60 percent did. The analysis also suggests a parallel with the restaurant study: when faced with many options, investors tended to be a lot more cautious in their investment strategy.

The Effects of Choice Compexity

As is apparent from the examples above, choice complexity arising from too many options has a number of significant consequences.

1) Deferral and non-participation; people simply decide they do not want to make a purchase now.

2) The nature of choices made: a smaller choice set encourages varied and perhaps aggressive / risky choices, while a complex choice might result in a smaller number of conservative choices with a view to minimizing regret.

3) Status quo and the increasing role of defaults and suggestions: When choices are too complex, people simply prefer to go with a default option.

4) People also tend to use others’ choices as a heuristic to what they should choose. For instance, employees in matching retirement programs tend to have fund allocations that are close to the median of their peer group.

5) Defection: In the world of marketing, we found that a brand that has a large number of variants runs the risk of losing share to one that has a more streamlined set of offerings.

In ongoing research, we also document a sixth phenomenon that we call extremeness seeking. When a friend of ours was buying a car in Colorado many years ago, the dealer gave him the following options:

a) A basic version;

b) a basic version plus a ski package; features that added value to a frequent skier;

c) a basic version plus winter package; features for people living in long winter,

d) a basic version plus an off-road package; features that added value to people who drove off the beaten track; and

e) a fully-loaded version with all the features included.

Our friend was confused. He wasn’t quite sure if he was more of a ‘ski person’ or an ‘off-road’ person, and whether he really wanted to forego any of the features from the winter package. He ended up purchasing the fully loaded package.

Taking the cue from this conversation, we conducted experiments in four product categories. Participants in our studies were asked to make a choice between a basic version, a fully-loaded version, and one or more intermediate versions that were combined to create a non-alignable assortment. Some participants saw three options (the two extreme options plus one intermediate), some saw four and others saw five. We were interested in the following question: as assortment sizes go up, are people more likely to choose one of the extreme (basic or fully-loaded) versions of the product? Our data showed that this was indeed the case.

We call this phenomenon ‘extremeness seeking’: as it becomes increasingly difficult to make tradeoffs between variants in a choice set, people gravitate towards either a basic version of the product or a fully-loaded version that contains all of the additional attributes. Unsurprisingly, we also found that when the assortment was alignable in nature, extremeness seeking did not arise.

Putting it all together: Navigating Complex Choices

Providing a large number of options clearly has its benefits. If people are perfectly rational, if they have no cognitive limitations, ifthey evaluate options on a single metric called ‘utility’, and ifthey do not experience emotions like regret or guilt, increasing choice set size can indeed help an individual find an option that is closest to their idea preferences.

However, none of these assumptions are truly representative of real people. Further, there is something personally satisfying about having the right to choose, rather than having an option thrust upon us. In sum, choice complexity is here to stay. The relevant question is, what can providers of choice do to help people make better decisions that allow them to harness the benefits of large choice sets? There are five strategies:

  1. Streamline choices.

A number of organizations have streamlined choices in response to the concerns about choice complexity. In recent years, Procter & Gamble has taken to rationalizing its product lines in many packaged-good categories. In an unrelated category, researchers studied individual’s decisions to enroll in 401(k) retirement plans administered by Hewitt Associates and found that if the choice was presented in a streamlined fashion (i.e., whether or not to enroll into a default plan), participation in the program increased dramatically.

2. Help individuals understand their own preferences and tradeoffs.

Perhaps the single fundamental reason for choice complexity has to do with the fact that most humans are limited cognitive processers of information. Technology and the internet provide one set of solutions: the development of web-based intelligent software applications that can help online shoppers find products and services that best fit their needs. shopping agents or shopping bots allow individuals to specify their needs and preferences at the level of an attribute, and then develop models of the buyer which are applied to available options in the marketplace to make recommendations. Others are simple price and attribute comparison agents that allow the individual to better understand the tradeoffs inherent in the available choice sets. In situations where an individual might find it difficult to express their preferences as tradeoffs (e.g., objects of art, music, literature), collaborative filtering agents (e.g., amazon.com; iTunes Genius) are now able to make recommendations to users based on information about the current consumption patterns of the individual.

3. Organize and eliminate options.

Rather than presenting all options in a complex choice set simultaneously, they could be categorized into different groups, and some of these groups could be eliminated sequentially as a function of the individual’s stated preference until the choice set is narrowed down to a manageable number. For instance, rather than presenting a prospective new home buyer with a listing of 200 available houses, a real estate agent might group them by location, age, proximity to the subway and school district. By gauging the importance of each of these underlying attributes, the agent can then start eliminating options from the choice set till they are down to a manageable set of options.

4. Encouraging attribute based decision-making.

A close look at the typical Chinese take-out menu shows that most of the very large number of options available can be generated by considering permutations of a number of simple attributes. These may include the protein being cooked (beef, chicken, pork or tofu), the style of cooking (stir fried, boiled, grilled), the type of sauce used (sweet and sour, chilli, nut) and the type of noodles or rice requested (white rice, fried rice, vermicelli). Rather than presenting a patron with the resulting 154 options – each with a brand name like ‘General Tso’s chicken’, it might make more sense to ask the patron four separate questions about what protein they want, how they want it cooked, what sauce they would like and what rice / noodle they want with it. In a field study with a family-owned Chinese take-out restaurant, I found that the strategy of replacing the menu with these four questions resulted in an overall increase in sales, a greater tendency to seek variety, and more participative and enthusiastic consumers.

5. Outsource choice.

Perhaps the simplest form of outsourcing choice is to choose a recommended or default option. In this case, an individual relies on the presumed expertise of the recommendation provider and essentially allows this expert to make choices for them. A more active form of choice happens, for example, when an individual approaches a wealth manager and tasks them to manage their investment portfolio and make suitable buy / hold / sell decision. Alternately, a patient deferring to the opinion of a doctor on a treatment plan is another example of an outsourced choice.