Behavioural Economics: Part Two – Choice Overload and Decision Making

By Shani Flynn | 24 Apr 2013

In the world of retail, there are clear advantages to an ever-expanding plethora of choice, but it has its limits, writes Shani Flynn.

On average, we make about 70 decisions per day. There’s no denying that many of us in developed society are faced with an abundance of choice – and most usually revel in it.

It is possible this is because we are operating under the collective assumption that the following hypothetical syllogism (posed by Barry Schwartz, Professor of Social Theory and Social Action at Swarthmore College) is true:

P1: “The more freedom and autonomy people have, the greater their well being.

[P2:] The more choice people have, the greater their freedom and autonomy.

Therefore, the more choice people have, the greater their well being.”

In the world of retail, there are some clear advantages to our ever expanding plethora of choice: competitive pricing, reduced risk of missing a superior option when searching, and a greater chance of finding a product/service in line with our preferences.

However, as Schwartz posits, the relationship between choice and well-being is not as obvious as the conventional wisdom would suggest. Research in behavioral economics and consumer psychology reveals that it is possible to present people with too much choice; instead of benefiting the consumer and the retailer, it can have the inverse effect for both.

The negative utility caused by ‘information overload’ manifests itself in one of two ways:

  1. It can induce what Schwartz deems “analysis paralysis,” whereby the consumer will become so overwhelmed with options that the brain will look for the easiest option, and the easiest option is to simply not choose at all: to not make a purchase.
  2. If one does decide to purchase, one may be dissatisfied with his choice, even if it was the objectively optimal decision.

The Paradox of Large Assortments

As Alexander Chernev, Associate Professor of Kellogg School of Management, Northwestern University states, “people universally prefer larger assortments,” but when faced with such assortments, consumers are “less likely to choose, less confident in their choices, and less satisfied with the outcome that if they had chosen from small assortments.”

Chernev on choice and decision making

Alexander Chernev’s depiction of the relationship between assortment size and consumer value.

The Four ‘Feel-Bad’ Signs of Choice Overload

Whilst too much choice can often result in non-optimal consumer decisions, the more concerning finding is that people often feel worse off even after making an objectively good decision, ultimately undermining consumer satisfaction. The following are signs of choice overload associated dissatisfaction, which all feed off each other:

  • Anticipated regret (which may lead to paralysis and no purchase) and post-decision regret
  • Missed opportunities
  • High expectations
  • Self blame

As an assortment size grows, so too does the idea that the consumer will be able to satisfy all their preferences and find their ‘ideal’ product/service. Though it is an objectively better environment, with such raised expectations, the greater the likelihood the consumer will choose not to purchase if the perfect option is not available, or will regret whatever option they have opted for. This is much less likely to happen with smaller choice sets, as the expectations are lower.

In the case of two people being dissatisfied with a purchase, person ‘A’ having chosen from a large assortment and person ‘B’ having chosen from a small assortment, person ‘A’ is likely to feel predictably worse. This is due to the propensity for one to ‘self blame’, given that there was a greater chance of success with so many available options than there could have been with person B’s small choice set.

It would not be illogical to hypothesise that if experiencing such symptoms, the consumer might make negative associations with the retailer, ruining consumer relations and the chance for repeat business.

Make Choosing Easier and Reap the Rewards    

  1. Less is more: simply reduce the number of available options.  A study conducted by Peter Boatwright and Joseph C. Nunes showed that a reduction in assortment size can markedly increase sales: An online grocery store reduced the choice set of products by an average of 54% and saw sales increase by 11%, with approximately 75% of customers spending more.  NB: To say nothing of all the money saved in the reduction process itself.
  2. Be selective in marketing: If reducing available options isn’t appealing, instead promote a small sub-set of options that is likely to appeal to the average (or novice) consumer. E.g. promote the most popular option.
  3. Offer online decision support tools: Interactive decision aids such as Levi’s Curve ID, allows consumers to figure out their preferences before being bombarded by choice and improves the quality and efficiency of purchase decision.  Consider using tools for both selecting an assortment (i.e. a recommendation agent) and for selecting an option from that assortment (i.e. a comparison matrix).
  4. Streamline the organization of options: According to Psycho-economist Sheena Iyengar, “people can handle more categories than they can choices”.  Try bundling, or divide larger assortments into smaller sub-categories.
  5. Implement default settings: As discussed in Part One of this series, whether people need to opt-out or opt-in, chances are in both cases, people will choose not to act at all, meaning that retailers are likely to make considerable profit from organizing choice around defaults.  It is also much easier for the consumer to have a default setting as a benchmark when evaluating options; comparing each other option to the default option is easier than comparing each option relative to all others available.
  6. Don’t try to be ‘all things to all people’: If you attempt to offer something for everyone, it will only serve to increase operational expenses and choice overload.  When attempting to determine optimal assortment size, retailers should consider the benefits and costs of adding new options because at some point, more options will result in disutility and therefore a decrease in profit.

Incorporating strategies to decrease information and choice overload, analysis paralysis, and purchase dissatisfaction, will not only increase sales but will create value for consumers, begetting loyalty and contentment.

1 Comment

One thought on “Behavioural Economics: Part Two – Choice Overload and Decision Making”

  1. Dennis says:

    Less is more when the consumer is unfamiliar with the product, but more is more if the customer is familiar/comfortable. E.g. a specialty Frozen Yoghurt store with 300 flavours is an experience, but choosing between 300 types of medical insurance is a night mare.

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