We live in a world where we are compelled to make so many choices every single day. What should I wear? Which shampoo should I use? What is the best school for my child? Our brain has to go through complex decision making processes whenever we are encountered with choices. Often, our brain doesn’t like going through these strenuous processes and begins taking shortcuts to make decisions. These mental shortcuts are known as heuristics.
According to traditional economic theory, humans are considered to be rational beings, no matter how many choices we throw at homo economicus, the economic man (or woman) would make a rational choice for themselves. But here’s the twist -- the person you thought was rational enough to make the best possible decision is in fact the most irrational person on this planet! According to the Rational choice theory, given a set of choices a rational person would be able to rank them according to a set of preferences and then choose the one which gives the highest utility. Now when we accept the reality that we are not rational beings we need to ponder: do we always make right choice for ourselves? Do we make a choice that gives the highest utility and satisfaction?
In the field of research of behavioral economics, we consider the decision-maker to be irrational. The theories developed in this field are much more practical and applicable to real world. Behavioural economics is a widely popular field within economics which has several applications in policy making, finance, and business, to name a few.
Humans always value freedom. One such is freedom of choice. We all love that we have the freedom to choose what we want- be it the freedom to choose an insurance plan or a vacation destination. Markets understand this and so we are presented with a plethora of choices. At a visit to your neighborhood store, you will be overwhelmed with the variety of soaps, shampoos, toothpastes, etc. available to choose from. Indeed, market analysts are predicting a stronger growth for FMCG brands in India, compared to China. Thus, we have enormous choices available to us when we go and buy a certain commodity.
But how optimal is it for the decision-maker to face such a choice overload?
A growing body of research in the area of choice overload pioneered by Dr. Sheena Iyengar suggests that people find it difficult to make choices when they are provided with overwhelming amount of options. They also sometimes end up making a bad choice or they may completely refuse to make any choice at all. Choosing the default choice over various others available is one way in which people try to avoid the cognitive load. Given the fact that everyone is unique, the default option in that case would not be an optimal choice for every person.. Suboptimal choice, in that context, may take place unintentionally. This is not an intended outcome of the process of providing large number of choices. Research suggests that it is better to provide a limited number of choices to people rather than providing them extensive number of choices. If we look at the other extreme, provision of no choice is also not desirable. This will certainly be of disutility to the consumer as they are not given their freedom to exercise their will. The only people who can handle such large number of choices are “experts” who have extensive knowledge about the product or service and have been using it for a long time. By repetitive use they have mastered the art of finding out the best choice for themselves. Experts have a distinct ability to organize and interpret all of the information that is presented to them. They can carefully sort and discard the irrelevant information. Not everyone is an expert in all domains due to cognitive limitations but all of us are expert in at least one domain that we are very passionate about. For example, consider a globetrotter who is planning her next vacation. There are large number of places she can visit .Through her experience of traveling and the preferences for the places she has in her mind, she can eliminate a vast majority of choices she has for herself and easily make a choice for her next holiday destination.
So now the question is, how can we help novices make better decisions? Professor Sheena Iyengar suggests that first, the choice provider should cut down the number of choices it offers. The choice provider should indulge in careful trimming of choices. For e.g., when Procter & Gamble (the choice provider) went down from 26 different choices to 15 different choices of Head & Shoulders Shampoo, sales shot up by 10%. Another classic example that can be thought of is Google vs. Yahoo. Google provides a very simple and clean user interface whereas when you visit Yahoo’s homepage you would be overwhelmed by the choice of actions it provides to its users. This small action of cutting down the choices at the very first step of decision making makes Google one of the most used search engine.
The next solution is that of categorization, which refers to grouping of similar choices. Categorization reduces the cognitive load and it also helps consumers better understand their options. For example, the online streaming site Netflix offers on an average 6494 movies and 1609 TV shows to the US audience. These are enormous numbers, but Netflix has made the choosing process easier for the customers by categorizing the shows into different genres which makes it easier for the consumer to choose.
So the takeaway is be happy with the amount of choices you have. Who knows that one day you might fight yourself floating in ocean of choices and then reminisce the good old days!