Wednesday, November 28, 2007

Too Many Choices

Hey, do you want some ice cream?

What if I asked: Do you want chocolate ice cream, cookies and cream ice cream, apple pie, key lime pie, brownies, cookies, or cupcakes for dessert?

Which question is easier to answer?

The Dutch government commissioned an experimental economic study (Schram, Sonnemans. "How Individuals Choose Health Insurance: An Experimental Analysis." forthcoming) on how people choose health insurance plans when presented with different options. They found that when people have more options, they look at more absolute information, but less relative information and end up making worse choices. I think this is true in just about every decision-making environment.

The more choices you have, the more time you take to make a decision, and you process less information about each option on average, while it's even harder to pick a clear winner.

When I was home over Thanksgiving, my mom made some (pretty bad) brownies. She said that she tried to get just plain old, regular brownies. Apparently there are 5,311 different kinds the store offers now with all kinds of options. Let a brownie be a multidimensional good B(C,K,M,T)
Where:
C
hocolate set {milk, dutch, dark, Hershey brand, double, white}
Kind set {chewy, cake-like, thick}
Mix-ins {walnuts, nothing, chocolate syrup, another color mix for marbling}
Toppings {chocolate syrup, icing, different kind of icing, none, nuts}
As you can see, there are too many choices for brownies (all the permutations that give you different types of Brownies = B(C,K,M,T). You stand there for hours debating which box you should pick up. They all have different properties along the dimensions of: taste, cooking time, price, ease of making, consistency, size. This is just too much info for somebody to process. I say just put out a box of brownies with nuts and syrup and icing all in separately sealed containers, so you can either choose to use them or not when you start baking. I guess you could just pick what's most important to you and come up with a time-saving choice rule (I will get the one with the Hershey brand, no matter what the other components are).

Buying a new car or choosing which candidate to vote for have the same sorts of problems. Both things are so multidimensional that it's almost sure that one package will fall short of the other on at least one dimension. You have to decide how to rank the importance of each component of the package and come up with a decision rule that lets you pick something that's available. It's just about impossible to find a political candidate that you agree with on every issue or a car that's perfect in every way.
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