By Jonah Abrams
Jonah Abrams received the first place award in the HUEA x Harvard Economics Review international high school economics essay competition.
(Cover photo from Mark Rowland with Your Marketing Rules)
Patrick Henry asked for liberty or death. A group of economists and psychologists have
proven that too much liberty is, if not death, a different kind of sub-optimal. It turns out that
often when we have more choices, we paradoxically are worse off. We make poor decisions, and
we feel subjectively bad about them. In the market we see the practical response to this concept
in the limited number of offerings in a Bonobos store, the spare interface of an iPhone, and the
musings of tidying-guru Marie Kondo.
This now popular idea that “less is more” sounds wise and can be comforting, but it is
just as wrong as perfect liberty. Instead, we gain from additional options when the benefits of
having the additional options outweigh the costs of processing the choice. The costs rise with the
choice difficulty and complexity. The benefit of additional options is valuable when the stakes
are high so that the effort subjects are willing to expend is high as well. Even in this case,
sometimes the benefit of an extra option is offset by two behavioral biases - hedonic adaptation
and regret. Based on economists’ research over the last several years, we now have a structure to
help us determine when we should limit our choices.
The idea of choice overload has a long history beginning with Aristotle who described
the difficulty people faced when presented with two equally good choices. This idea more
recently was popularized in 2000 with what has been somewhat breathlessly called “one of the
most memorable economic studies of the last half century.” It used a simple product, jam. Thirty
percent of supermarket consumers that saw a 6 jam display bought a product. For those that saw
a 24 jam display, just 3% bought a jam. This “analysis paralysis” for jam ended up being just
one of many examples of the the impact of choice overload on many decisions we make. It was
found in other consumer discretionary products like chocolate selection and consumer
electronics , but also in areas as varied as pensions, medical choices, and dating. When 401(k)
plans offer more funds, participation rates fall precipitously - for every 10 extra funds a 401(k)
plan offers, participation rates fall by 1.5% to 2%. Similarly, when doctors are offered two
medicine choices to prescribe instead of one, they paradoxically double their referrals to
specialists because they are unable to make a decision. When online daters are offered a large choice of partners and can reverse their decision, they are less satisfied with their partner
selection than those offered a small set of partners with no chance of reversing their decision.
The economics of choice has not been without controversy. There have been many
studies that found no paradox of choice - that more choice is in fact better. For instance, Daniel
Mochon has written about single option aversion. When Williams Sonoma added a second $429
breadmaker to their previous single offering at $279, the sales of the $279 version doubled. The
same results hold for consumers choosing nightclubs and savings accounts. Consumers, at least
to a point, prefer larger assortments when presented with them. These types of results seem to
directly contradict the general thrust of the choice overload hypothesis.
Until recently, it was not known whether the paradox of choice was in fact a paradox.
However, two meta-analytic reviews, one by Chernev et al. in 2015 and a second by McShane
et al. in 2018 , focused on the context in which choice overload might apply, rather than
assuming that its effect was universal. These studies provide a new, more nuanced view of
choice. It turns out that choice overload is very contingent on the structure of the choice.
These studies found that the paradox of choice is in fact a paradox but that more choice is
not always worse. More importantly, they provided a taxonomy to help us understand when
choice overload might apply. There are four main factors that moderate the effect. The first is
choice difficulty. This is defined as how many attributes describe each choice or how well
ordered the presentation of the choices is. A second factor is choice complexity. Complexity is
reduced when there is a dominant option. It is increased when attributes of each option are not
alignable such as choosing between one car with an alarm system and another with a sunroof.
A third factor is the degree of preference uncertainty - do you know what an ideal choice would look like before you are exposed to the choices. Finally, there is effort; in particular, how much
effort you are willing to expend. This is generally proportional to the stakes of the choice.
The results of these studies are largely intuitive. Both Chernev and McShane found
choice overload when common sense tells us that the moderators make it more likely: when the
task is difficult, when it is complex, when the subject has poorly articulated preferences or when
the effort the subject is willing to expend is low. In the opposite conditions, more choices in fact
lead to better outcomes. These particular findings are true (with some currently unexplained
exceptions ) across a broad range of outcome researchers measured: option selection
“goodness,” choice satisfaction, and switching post choice.
This contingent choice overload is caused by a number of well-known human behavioral
biases. We can begin with a founding idea of behavioral economics, bounded rationality.
Bounded rationality is Herbert Simon’s idea that humans have multiple perceptual and
computational constraints that are alleviated at some cost. In this context, the higher the cost of
making the decision, the higher the reward needs to be before people are willing to expend that
cost. More choice means more effort or cost, and if the cost rises faster relative to the benefit of
the extra choice, then the choice is less likely to be good.
More choice means higher decision costs, but not necessarily higher decision benefits.
This can be partially explained by hedonic adaptation. Hedonic adaptation is a tendency to get
used to both positive and negative changes in our lives and so return to previous levels of
happiness. It is implicated in the paradox of choice in that we are spoiled by the fruits of our choices. For example, we imagine winning the lottery as having a far greater impact on our
long-term happiness than lottery winners actually report. If we are bad at imagining how we will
feel when we make a particular choice, then the benefits of having lots of choices might be quite
low. In addition, perhaps we actually get used to having more choices (or more freedom) over
time, and so the benefits of that freedom become less and less pleasurable.
While the hedonic adaptation to more freedom reduces the pleasure of freedom slowly
over time, there is a human emotion that makes more choice worse immediately - regret.
Unfortunately, the more options we have, the more stories we can tell about the good alternatives
that got away. We do this both pre and post decision. This is especially true when there are
trade-offs that have many dimensions. In this case, there is often no one choice that is better on
all dimensions. This may be one reason why choice complexity causes experimental subjects to
feel subjectively worse about their decision. In addition, the more choices we have, the more
likely the choice we made was very close to another option. So if we have regret, we are now
regretting a near miss, and there is a large literature which shows that the closer the miss, the
worse the regret.
People should seek fewer choices when they don’t know what they want and the decision
involves low stakes and is difficult and complex. These are heuristics. Can economists offer
more specific advice? For most consumer products in rich western democracies, hedonic
adaptation is a powerful force reducing utility and therefore the benefit of many decisions to
zero. Assortment should be restricted for these types of decisions. This also applies to consumer
decisions that are hard to make and thus have low expected benefits. For dating apps information
quality is very low if your goal is to find a long-term partner. In a perfect stock market all
choices have the same expected return so additional choices have low expected benefits.
However, many professional purchasing decisions are different. Here hedonic adaptation is
rarely an issue since the reward is not consumed for pleasure. In addition, if buying for another
part of an organization, personal regret also plays little role. So at work, more choice is probably
better. These types of issues are the questions that future research might tackle to turn generic
wisdom into practical advice. Patrick Henry would be less an orator and more an economist if he
had taken what we know so far and said,
“Give me liberty or give me death, unless I am confounded by my bounded rationality, hedonic adaptation, and regret.”
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