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barry schwartz—the paradox of choice, why more is less

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We're very pleased to have you here for the marketing talk with Professor Barry Schwartz - The Paradox of Choice, and professor Schwartz were also very honored to have you here, thank you for coming. Barry Schwartz is the Doran Cartwide professor of social theory and social action at ( ) College. He is the author of 10 books, among them The battle for human nature, The cost of living and The paradox of choice, why less is more. He is a friend of both the American psychological association, and the American Psychological society, his research and teaching focus on the intersection of psychology and economics. And more specifically, how the abundance of choice in modern life, both liberates and bedevils Those who face it. So please join me in welcoming professor Schwartz Hi everybody, I'm really quite honored to be here, and... Just 2 preliminary remarks. One is that I'm shorter than I used to be. One is that I... I thought it was presumptious for me to make myself an expert in what you do. So, my talk is mostly not going to be about what you do, it's going to be about what I take to be a significant problem in people's lives more generally. And I trust that you're all smart enough A: To determine whether what I have to say is relevant to what you do. And then B: What to do about it. So I haven't tailored my remarks particularly, except for a few remarks here and there, to the particular concerns that I imagine folks who work here might have. I don't want to insult you by doing that. Second is: I'm happy to have you interrupt with questions and comments as I talk, and if it looks like it's getting out of hand, Since I'm a stern teacher I can just tell you to shut up and save it for the end. So don't hesitate if you want to raise something now and, as I say, if it looks like I'm never gonna get past my first two slides, then I'll change the rules. Ok? So. First, I want to acknowledge the people I've collaborated with on a lot of what I'm gonna talk to you about. Some of these are students of mine, some are colleagues in various places, anything you find worth while they had nothing to do with. There is in American society, not only in American society, but more here than anywhere else, what I have come to call The Official Syllogism. This is a set of assumptions that we have about well-being and about how society should be organized that runs so deep, that I don't think we realize that we make them. And the only time you start to realize that you make them is when you start to accumulate evidence that that they're wrong. So what is this official syllogism? First, we all think that the more freedom people have, the more welfare they have. How could you think otherwise. It's a no-brainer. What argument could you even make to suggest that there's anything wrong with this assumption? The second thing we think is that the more choice people have, the more freedom they have. What does freedom mean if not choice? In fact for most Americans, particularly Americans of the educated classes, Freedom and choice are 2 words for the same thing. To say that people have more freedom is to say that people have more choice. And so, it follows from these 2 assumptions, that the more choice people have, the more welfare they have. So, as I say, we so deeply believe this to be true, that we didn't, probably most of us didn't realize that this was just a set of assumptions, that there are other assumptions one could make and that they could even be empirically false. And I'm gonna try to convince you today that they are empirically false. First: to what extent has modern life embodied these assumptions? And improved peoples lives my giving them choice? This is my supermarket. Which is not an especially big one. The salad dressings, I should point out, That doesn't include the 10 extra virgin olive oils and 12 balsamic vinegars that were also there in case none of the 175 salad dressings suited you. So, those of you who can do commutatorial mathematics can compute how many home made salad dressings you can create out of all those balsamic vinegars. So there's a huge amount of choices, even choices about how we get our stuff packaged. I want to give credit to the cartoon bank all, you're gonna see a bunch of cartoons from the New Yorker so you don't go to sleep. And so, I want to acknowledge the cartoon bank, which has generously given me permission to show some, but not all of the cartoons that I'm gonna be showing you. So.... We've always had choices in supermarkets and now we have more choice. How much more? In the United States, there was a three-fold increase in brands on grocery shelves in the 1990's. The average grocery has upwards of 30.000 SKUs. And these mega groceries, god only knows how much they have. So, we've always had choice, now we have more choice. And in the world of consumer goods, that, you can tell the same story pretty much everywhere. There was always choice, and now there's more choice. And one could argue that this is merely a quantitative change, no big deal. Well, 2 things about that. 1. Quantitative changes sometimes become qualitative, if they're big enough, but second: In addition to having more options than we used to have in areas where we always had options, there are whole new domains in life, where there used to be no options where now people have significant options. And I mention this because I want to give you a sense of what it is that is on everybody's shoulders as they get up out of bed every morning. Some of these choices are inconsequential, others are extremely consequential. I'll give you just a few examples of, there are many more... There's probably no one in this room, except me who's old enough to know there was once a time when you could get any kind of phone service you wanted. as long as it was provided by a TNT. There was a monopoly. There was the phone company. And not only was there the phone company, but the phone company owned the phone. You rent it. And you know what? It lasted 100 years, it never broke. In these days we get to choose long distance service, local service, cell phone service, and god knows we get to choose a lot of product. These are the cellphones of the future, The one I like best is the middle one, It's a phone, an mp3 player, a nose hair trimmer, and a creme brulee torch. And if you havn't seen this phone yet, You can be sure that in a week or two, you will. Now what that does is it leads people to go into their cell phone store and ask this question. And what's the answer to this question? Do you have a phone that doesn't do too much, the answer to this question is no. The only kind of cell phone, I think you can no longer buy is a cell phone that's just a phone. I guess this is progress, but it means that there's a lot of choices we have that we didn't have before. In the world of health care, the notion that the doctor told the patient what to do and the patient did it, is ... a distant memory. Nowadays, the ethic of medical care in the United States is the doctor and the patient autonomy. And what that means is that docs give you the options, explain what the cost and benefits of the various options and you choose. Docs propose, patients dispose. And if you say: "But what do you recommend?" A really principled doctor will say: "well I already told you these are the pluses and minuses of surgery, these are the pluses and minuses of chemotherapy, you have to choose." And if you then say: "but doc, if you were me, what would you do?" The doctor says: " but I'm not you." So an enormous burden is now on all of our shoulders, to make life and death decisions typically on the basis of close to no information. And this burden is mostly born by women, who take care of themselves, take care of their children and also take care of their husbands. The clearest evidence of how the world of healthcare has changed, is in the direct marketing of prescription drugs to people like you and me. Hundreds of millions of dollars are pent every year by drug companies selling products to people who can't buy them. Why would you ever have an ad for prescription drugs on network television show? The only explanation is that the model now is that patients will call the doctors office the next morning and insist that they get switched from drug x to drug y because they just saw a commercial. And there must also be the expectation that docs will honor the patients request. I don't think companies just burn money. Physical appearance is a matter of choice in a way that it didn't use to be. What do I mean by that? What I mean is that There's essentially no part of your body that can't be altered. And not only is that true, but it's no longer even something to be ashamed of, you know, People used to have cosmetic surgery and pretend that they hadn't. And of course everybody knew that they had, because, you know, their faces looked weirdly construceted, but everyone politely didn't talk about it. Nowadays people brag about their cosmetic surgeries. At least on the two coasts. If you have too much tissue in one part of your body, and not enough in another, you can just suck it out of the part, place where you don't want it, inject it into the place where you do. What's the consequence of this? The consequence is that how you look is a matter of choice, which means that if you're unattractive it's your fault. Nobody has to play the hand they were dealt any longer. In the world of work, I know this doesn't apply to the people in this room, but modern technology has made it possible for each of us to work every minute of every day, no matter where on earth we are. And what that means, is whether or not to work is a matter of choice. Every minute of every day. You take your kid to play soccer, and you're sitting there, watching the game and you got your cell phone on one hip, and your blackberry on your other hip and your laptop on your lap, and they're all off. And as you watch this boring game, You ask yourself, maybe I can return that call and answer that E-mail and draft that letter and even if you say "no" to all of those things, You're thinking about saying "yes", you're deliberating about it, which means you have a decision to make. And it's a decision you have to make basically every 30 seconds. Because the game sure as hell isn't gonna get less boring. As you watch it... Just wanna go home, crawl into bed and do some more work. As I said, I know that this doesn't apply to anyone in this room. The company pension is a thing of the past. For a couple of reasons. One is that companies would much rather have their employees bare the risk than that they do, but the second is that instead of having a single financial instrument, or couple of financial instruments That your pensions money goes into, Employers in their benevolence have now offered people large numbers of options to choose from. You have in many work places a wide array of possible investment vehicles for your retirement pension and I'll talk a little bit later about the consequence of that. Just to show you that everybody bares some responsibility for this, institutions like mine have completely abdicated responsibility for being educational institutions, We have this gigantic list of courses, and basically tell kids "take whatever you want." Often with disastrous consequences. Now, in the world of family, At least 2 generations ago, maybe one and a half generations ago, I mean, nobody ever forced you to get married and nobody forced you to have kids. But there was what you might call a default assumption. That was very powerful and governed almost everybody's behavior and the default assumption was that you get married as soon as you can and you start having a family as soon as you can. And there was only one choice to be made, and that was who. The rest was, sort of laid out for you. Those days are certainly gone. Whether to get married, whether to do it soon or do it late, whether or not to have kids, whether to do that soon or late, none of these things is taking for granted there is no default. And what that means is that young people spend an enormous amount of their time thinking about things that were non-decisions when I was their age. There's a lot that's good about this. But one unfortunate consequence of it is that they spend a lot less time doing the work that I give them. And I can't say that I blame them, you know, I mean, these are important things to figure out and reading another journal article is not a life and death thing whereas making the wrong decision about your romantic life might be. So they're just willing not to do all the work and get bad grades, so I just kept assigning less and less work. Unfortunately it hasn't helped them make any wiser romantic decisions. Even your identity has become a matter of choice in a way that it wasn't years ago in a sense that even though you probably inherit an identity, from your family, your community and so on. It's changeable. You can reinvent yourself on a regular basis. One is encouraged to do that. Who do I want to be today? There's this company in Seattle , that had a slogan about where do you want to go today? Micro-something, this is " who do I want to be today?" It's just as applicable. You gotta admit these cartoons are good, right? So, in every corner of our lives as Americans The world we used to live in, looked kind of like this: And the world we now live in looks like this. And the question is: "Is this good news or bad news?" And the answer, as I'm sure you can tell, is yes. Now I want to be absolutely clear about this though it never helps to say this, I will say it, Choice and freedom are good. Almost all of the things that I have just run down for you represent real improvements. In the human possibilities, in the opportunity for people to be autonomous, and in control of their lives, and all of that is good. Ok, I said it. Remember that I said it. Everyone knows that. The thing that people have not been mindful of, is that it is also bad, bad in various ways that I'm about to describe. That is to say there is a dark side to all of this freedom of choice, which has been, up until now, completely ignored. And I'm gonna try to spell out the dark- all the rest of this talk is going to be black, black, black, black all the things that make everybody miserable. But remember that I know, just as you do, that choice is a wonderful thing. Just not as wonderful as we thought. So there was a survey done in europe and the stem... the stem sentence of the sentence was "There is currently more choice than I need..." And then they ask people about various different aspects of consumer good, and the results they got were this: with respect to clothing, this is the percentage of people who agree that there is currently more choice than they need. Washing machines, savings accounts, Utilities, Cars, Cleaning products and cell phones. There were no items on the list Where less than a majority of people agreed that there was more choice then they needed. So with respect to everything, people thought that there was more choice than they needed They just differed from one item to another in how much they agreed that there was more choice than they needed. So there seems to be a coming together, a consensus, that people have more decisions to make than it's worth their time and trouble to be making. And I think there are 3 different effects that too much choice has. And I'm gonna talk about each of them. One effect of having too much choice is that it produces paralysis. There are so many options to consider that you end up choosing none. The first demonstration of this was at this fancy food store in in Palo Alto, the name of which I've forgotten, they often, whenever they get a new product, they put it on the table, so the people can sample it, So, the experimenters got them to cooperate in this store and they put out 24 different flavors of an imported jam And anyone who stopped by could sample as many different flavors as they wanted, and if they did they got a coupon that would get them a dollar off any jam they bought. A few days later they set up a table with 6 different flavors of the same jam. And if you stopped by and tasted you would get a coupon that would get you a dollar off. And what the experiment has found, is that more people came to the table when there were 24 jams then when there were 6. It was more inviting, it was more exciting it was more interesting... One tenth as many people bought jam. One tenth as many people bough jam. Ok, now, Same thing, they found the same thing with writing extra credit essays because of the connection with this company and Stanford, I though I should mention this, In a social psy. course, if you wrote an essay you can get extra credit towards your grade, and what was nice about this is that the credit was independent of the quality of what you wrote. Which can only happen at Stanford. So, one class, the kids got 30 different essay topics to chose from, in another class they got 6, and the investigators looked to see how many people actually wrote essays, Fewer people wrote essays when they had 30 topics to choose from then when they had 6 topics to chose form. And I think it's the same as with the Jam. You know, which flavor jam should I buy, they're all attractive, you know this is novel, this is distinctive, this I know I like, ahh I'll buy peanut butter. Same thing happens with the essays. All these interesting topics and I don't know which one to chose so I end up doing calculus homework instead. Speed dating! You know what speed dating is? Of course you do, so I mean, if not here, where? So they set up two speed dating evenings, and in one evening people had 12 dates, and then in another one they had 6, and the question was how many matches get made? And the answer is more matches are made when you have 6 dates then when you have 12. See more people, have more choices, make fewer selections. And finally, to raise the stakes quite by a lot: The researches got access, thanks to the cooperation of vanguard and about 1500 employers, to the investment records of about a million employees. working, as I say at about 1500 different companies. And what they were interested was this. How does the number of mutual funds that the employer makes available affect the rate at which employees participate? So all you're doing is, you know, one company offers 3 funds, one 10, one 30, one 100, one 300, Does that matter? The answer is yes. How does it matter? For every 10 funds the employer makes available, participation goes down 2% The more funds you offer, the lower the rate of participation. Understand that in most of these cases, not all, but most, not participating meant passing up significant amount of money from the employer. Matching money. It was like talking a match and lighting it to a 5.000 dollar bill cause you didn't know which fund to put your retirement money into. Now this is in extremely consequential findings, since Americans save nothing, and everybody is gonna be eating dog food in 30 years when they retire with no money in the bank, and what makes the discretion significant, is that if you were a benevolent employer, and you were concerned that your employees weren't putting enough money away for their retirement and you went to an investment adviser, any investment adviser, and said: "listen, what can I do to get my employees to save more?" Every single one of them would have told you the same thing. Give them more choice. Then everyone will find just the right fund, with the right amount of risk, and safety and so on, to satisfy their particular needs and tastes. Give them more choice, the worst possible advice. So this is the first effect of too much choice, it produces paralysis. There's a little bit of research in real life on reducing assortment in groceries. For some reason all the research that's been done in real life settings, has been done in supermarkets. What happens when you reduce the amount of selection in a grocery, is that the strong brands gain market share, the higher priced products gain market share, store brands lose market share, and by and large, shoppers are not influenced by how many different kinds of things are on the shelves, They're just influenced by how much stuff is on the shelves. So as long as you keep the amount of stuff on the shelves bountiful, There will be no perception on the part of shoppers that you have reduced choice. However, they will buy more, and they'll be more satisfied. They won't feel like you've taken anything away from them, They will shop, they will buy more and they'll be happier with the experience. Overall sales go up, though only marginally, when you reduce variety. So, Store brands lose, well I mean statistically, reliable, yeah. I mean, I suppose this is probably a compliment to higher priced brands, I mean, higher priced brands gaining. Pardon me? It's not in the store's interest to change because it wants you to buy it's brand because it's got a better it's got a better mark up. That may be true. But also, there are only a handful of studies and we don't know if this is inevitable. This is what's been found, but if you engineer things, you might be able to get the benefits of reduced selections without paying that particular price. For example, Trader Joe's is the fastest growing supermarket chain in the United States and everything there is store brand. Pretty much. So it's not inevitable. There are 2 caveats to this choice paralysis thing that's worth mentioning. 1 is what's known as preference articulation. If you know exactly what you're looking for, more choice is better. Because, the more options there are, the more likely it is that you'll be able to find exactly what you want. So he calls this "preference articulation" and the model here is before you look at anything, you sit down and you say, what do I want in a car? And you list all the things you care about in a car, and then you go out in the world to do a pattern match and find it. How often do people make choices like this? My estimate is never. At least for anything more complicated, then say, raisin. Instead what happens is you get a rough idea of what you care about in a car, It's gotta be safe, it's gotta be fuel efficient and after that you let the market figure out what else you care about. So you go shopping, trying to answer two questions. 1. What do I care about in a car? 2. Which one of these things has what I care about? And under those conditions, choice paralysis is a likely result. However, it's useful advice to you Personally, to sit down and figure out exactly why you're buying whatever it is you're buying before you look at any of the alternatives. I know that no one will do that, it's way too hard. Second. If the different options are alignable, meaning that they can all be scaled on the same dimension, then, again, more options are better than fewer. So, if you're going to Kentucky Fried Chicken™ I bet nobody eats that crap, If you're going to buy a Kentucky fried chicken or some equivalent, and it turns out that they now offer you a one box, a two box, a three box, a four box a five box, an eight box, a ... any size portion you want the more different size portions they offer the happier you are, everyone will be able to get exactly the number of pieces they want. And that's the only respect in which these different options differ, is the size of the box. So if you're talking about choices that are like this, more is better, more options are better than fewer. Again, how often are these the kinds of choices people are making? I would say close to never. Cause it almost always involves multiple dimensions and it involves making trade-offs and under those conditions, you can boggle the mind by giving people too much choice. Second. If you overcome paralysis and choose. The second effect that too much choice has, is it induces you to make worse decisions. In the dating case, the speed dating case, here's what happens. You ask people in advance, what do you care about in a romantic partner? And they tell you all of the right things. I want somebody who's smart, interesting, makes me laugh, kind, understanding, thoughtful, sensitive, empathic, and really hot. Ok, now comes the dating experience. Now, evaluating how smart, how kind, how empathic, how funny, how all of those things 12 different people are, is hard. So what do people do? They use a simplifying strategy and they end up choosing entirely on the basis of how hot. Then they wake up the next morning, and they go "what was I thinking?" So they adopt a strategy that makes the decision makeable , simplifying strategy, but the problem is that the criteria that are simple aren't the ones that really matter. So they will consistently make bad decisions just because the world has forced them to adopt a strategy that simplifies the information assessment task. In the case of the 401(k), people who knew that it was stupid beyond words not to participate "I have to participate, my employer's giving me 5000 bucks, I have to do something." What do they do? For every ten mutual funds you offer, the number of people who put their money into a money market account goes up 7%. So they make the worst possible investment, because they know they have to do something, but they don't know which thing, so they say "uhh I'll just put it in a bank and tomorrow I'll figure out what mutual fund to invest in. You know, they get ¾ of the percent, half percent interest, If you could take a dart, and throw it at the set of mutual fund opportunities and any of them would be better than what they choose. It's a nice simplifying strategy, but it's clearly not the right decision. Ok. But mostly I want to focus on the third effect that too much choice has. If you manage to overcome paralysis, and if you manage to make a good decision, What happens to the satisfaction of making good decisions? And I want to focus on this because I think this is in some ways the most surprising aspect of the problem and perhaps the most significant. People may do better, objectively, when they have a lot of options to choose from as opposed to a few. However, they will feel worse. Doing better and feeling worse is the song that i'm gonna be singing to you for the next.... long time. So, I mean... They don't quite say this, but this is what they're thinking. You can't save the captures, they never should have allowed us to be free range. OK Now, why does this happen? Well, I don't know exactly where to fit this in so I, I put it in here, it doesn't quite fit but it's aught to be relevant to you. A study was recently done, what it shows us is that people don't know their own minds very well. This will come as a shock to you I'm sure. This was a study, where people got to rate digital CD players. so it was all software, and one CD player had 7 features, one had 14 and one had 21, And people got to, first they they were asked which of them they would prefer. And the majority of people said they would prefer the CD player that had 21 features. That is to say, they're interested in choosing something that has enormous capability. Now, you let them construct their own CD player, by giving them a list of the 21 different features that are available, and you see how many of them they pick. They pick only of the 21. I want my CD player to have these particular customized 19 features. Now in the third experiment you actually let people use the CD player with 21 features for a while, give them a manual, let them play with it, And now you have them choose between that and a CD player that has 7 features, and now they choose the simpler one. So there's a trade off between capability and usability. This is, as far as I know, no one has figured out how to achieve maximum capability, and maximum usability in the same device There's a trade off, in prospect capability seems way more important than usability, in practice, the reverse is true. What's weird about this though, is that, it's not like the people in this study haven't already learned this. Right? they probably have closets full of devices that they never use, because they couldn't figure out how to make them do the simple things, because it was able to do all these complicated things. They have taught themselves again and again and again that usability is more important than capability nonetheless, when the next device appears, it seems that they're driven by capability rather than usability. So people are not likely to get this right on their own. And I mention this because you are in, perhaps, a unique position in knowing this, to help, to protect people from themselves. Which is what I'm recommend to you at the end. So why is it that all this choice makes people miserable? There are 4 different things. 4 different reasons. The first is regret. You choose something, and it's good. Is it perfect? Nothing's perfect. But it's good. Yeah It's true, you're absolutely right, I mean, capability is both a prediction about what you want the what you'll want the device to do and a prediction about what you're you'll be able to get the device to do. But experience teaches most people, not all people, that they will never, either for reasons of talent or temperament or time, they will never get the device to do all the wonderful things it can do. And that doesn't seem to stop them from choosing exactly that kind of device, the next time around. And it's not like these choices are free. Because, when you choose a device that's got a lot of capability, invariably the easy things are hard to do. Harder to do* So you know, plug and play? Right. So the result is that you end up getting even less out of the highly capable device, than you would out of a less capable device where it was transparent how to get it to do the things that you cared about. So yes, it may be aspirational, but the question is why don't people learn from their failed aspirational efforts of the past, to adopt a different set of standards about what they should be looking for. And people are endlessly optimistic tomorrow is the first day of the rest of my life, could be that. So regret. Any choice that's not perfect, it's easy to imagine an alternative would have been better, and the more alternatives there are, the more, the easier it is to imagine that an alternative would have been better. If there are only two kinds of cereal to choose from, How much can you regret the one you chose? If there are 200 well now, I mean, only an idiot could think that you actually stumbled on to the best cereal. So, what regret's gonna do, is it's gonna reduce the satisfaction you get out of good choices. What anticipated regret does, is it prevents you from making choices at all. You're so sure you're gonna regret the decision, that you don't make it. this, I'm sure, is a lot of why people don't put money into their 401(k)s. Some other fund will outperform the one they choose and they'll spend the rest of their lives kicking themselves. The specter of regret, I think, makes even unimportant decisions moon large, I mean, lasting for all eternity, french blue cheese or ranch? you know, for one salad, it really doesn't matter what dressing you have, but if I tell you you're gonna pick the salad dressing that you're gonna have from now until the end of time, you really wanna get that right. And I think that the specter that people will regret their decision is really what's driving the agony that people have making even inconsequential choices. Second related to regret, what economists call: opportunity cost. And that is once again you make a choice, but it's, the thing you choose is not the best in all respects. You get great gas mileage and real safety and reliability, but the ride isn't as smooth as you might like. Or you get a really smooth ride, and everybody stops and looks at your car as you drive by, but, again, the mileage sucks and the thing's in the shop every 3 days. So life is trade-offs. The more options you look at, the more options there are, the more options you look at, the more you will identify attractive features In options that you reject. And so you might well choose the thing that is the best for you. But still be unhappy about all these attractive features of other options that you had to pass up. And all of these opportunity costs add, and what they do cumulatively you subtract out of the satisfaction you get out of the decision you made even if you made the right decision. So, there's a lot to say about opportunity costs, parents aren't told enough about this when they are prospective parents, We found they really miss going to the theater and eating at nice restaurants so we gave our kids away. Then there's this one: I... People don't need to have this explained, even though they don't come from New York, but the thing to think about here is, Here are these people living in a midtown apartment house, and they have a place in the Hamptons and they are sitting on the beach, at the beach themselves, it's gorgeous, it's August. What could be better? Life is perfect, and all this guy is thinking, is that it's august, everyone in our neighborhood is away on vacation, I could be parking right in front of my house. And everyday he sits on the beach and instead of, you know, being thankful for the beautiful weather and the beautiful setting, all he is is he's pissed off at the parking spaces he's blowing. And that's gonna make his vacation a lot less enjoyable then it would have been if he didn't have to pass up great parking spaces. One last example, There's no caption on this one, I think a caption is quite unnecessary. Just to show you that this is not just a fiction of New Yorker cartoonist imagination, Here's a study: People participate in an experiment And then when they're done, you offer them 2 dollars as a token of appreciation for participating, Or, you say, we have these nice pens With the school logo, that are available in the book store for about 2 and a half dollars and if you'd rather, you can have a pen. And under these conditions, 75% of people chose the pen over the 2 bucks. In another condition, You offer them the 2 bucks, or that same good pen or two less expensive pens. Now, the question is what percentage of people in this condition will choose either of the pen options. And the answer, as it should be obvious to you, it has to be at least 75% Am I right? 75% of people prefer the good pen to 2 bucks How can fewer than 75% of people prefer either pen to two bucks? But then you're saying to yourself Why would he be talking to you about this trivial study? And the answer is that 45% choose either pen. And this really captures in a nutshell what opportunity costs do. You're looking at a good pen. And it's a good pen, it's nice to have a good pen. But you're giving up the opportunity to have 2 pens. And that makes the good pen feel less good. And you know, that'll take care of all the writing that you have to do for the whole semester. But you know, once in your life, it would be nice to write with a good pen. And that makes the 2 pens less good. So the thing that you're passing up with the alternative subtracts from the satisfaction you get from whichever one you choose, and suddenly, neither of the pens is as good as 2 dollars. So you take the 2 bucks. This, in a nutshell, is what life is like. when people are choosing from among a large set of attractive alternatives. The thing you end up choosing is never gonna be as good feel as good as it would have if the choice set was smaller. Another way of saying this, is that everything suffers from comparison. There's a nice little study, a-and I don't have time to give- there's a theoretical rationale for this that derives from a thoery That David Conovar and (Amon Stersky) developed known as prospect theory, some of you may have sort of encountered it in one place or another, (Ferski) was a psychologist at Stanford who sadly died about a decade ago of a brain tumor. And Conover just recently won the Nobel prize for this work. Anyway, there's a theoretical rationale for this, but result is simply this You ask one set of people in the San Fransisco area How much would you pay for a plane ticket for a weekend in Las Vegas? How much would you be willing to pay for to fly for a long weekend in Las Vegas? And people give you a number. Other group of people you say: You know, you're thinking about going away to Seattle To... L.A. and to Las Vegas how much would you pay for a plane ticket to Las Vegas? So you're asking them the same question. But in one case you are forcing them explicitly to think about the value of going to Las Vegas in comparison with the alternatives. And they, people are willing to pay significant less money in the latter case than in the former. And this is true, whether it's Las Vegas or L.A or Seattle, doesn't matter which one you're asking about People will pay less for a ticket anyplace, When they're evaluating in a larger set than when they're evaluating it by itself. Ok. One other thing about opportunity cost that might surprise you. Is there anyone in this room who's pressed for time? No, no, you are treated really really well. So why do you think people feel so much time pressure? Mostly people assume, I assume, that it's the pressure to get the things done that you have to get done. We all have a very long to do list, we never get to the bottom of it, and that's why we feel rushed for time. So people did a study, in which some people had to list all the things they had to do. And then other people were asked to list all the things they'd like to do. And then they were asked a bunch of questions having to do with time pressure, And guess which group felt more time pressure? Not the group with the list of chores, the group with the list of desirable activities. What really seems to create a sense that there's not enough time, is all of the things we want to do, and like to do, that we don't have time to do and that we're gonna have to make choices among that create this sense that there's not enough time in life for me to be the person I want to be and Do the things I want to do. Ok third. I don't wanna talk about that. The third reason why we do well and feel crappy, is that, when there are a lot of options, it's inevitable that our expectations about how good the chosen object will be go up. The story I use to make this point is: when I went to replace my jeans at the gap, and for years and years I'd buy jeans and they came in one style and I bought them, and they fit however they fit, Which was usually not very well, and you know, sort of break them in adn wear them forever because it was so unpleasant to break them in So I go and replace my jeans and I give them the size and And I get asked, you want slim fit, easy fit, relaxed fit, buttons lies, zipper flies, stone wash, acid wash, I don't know, it goes on... so I try on every damn kind of jeans they had, and I walked out with the best fitting jeans I had ever had. Honest. And I felt worse. I did better and I felt worse. The question was why, and the answer was when they only came in one style or two, I had no expectations about how well they would fit. When they came in 20 styles I expected perfection. And what i got was good, but it wasn't perfection. We evaluate our experiences in large part, by comparing them to what we expect them to be, and if our expectations are high, even good experiences will end up feeling like we have failed. And there's no way I could imagine, that adding options to people's lives will do anything other than raise people's expectations. Plus the world does this to us, right? Travel agents, Contractors, would it be possible for you totally exaggerate how much it will cost and how long it will take so we'll be pleasantly surprised in the end? Everything was better back when everything was worse. The truth in this is, that when everything was worse, people's expectations were lower, so that it was possible, occasionally, to have an experience that exceeded expectations. In modern American society, at least among the affluent, I don't think it's possible for anything to happen that's better than we expect it to be. Because we expect everything to be perfect. And that's a recipe for, at least disappointment, if not for abject misery. And all this choice is one reason why. this is an exaggeration but it's funny. We tend to romanticize poverty, just to let you know, in case you care, this is false, people are not happy in stinking hellholes of abject poverty. What is true, is that once you cross subsistence whatever subsistence is in your society, additional increases in wealth have virtually no effect on well being. There's a huge steep curve going from zero to subsistence, but once you cross that line, the curve flattens out. It's worth knowing in case you have a choice between X and making more money, almost certainly X is what you should choose. Self blame. The last thing that does us in, is that you make a choice, and it's a good choice, but it's not as good as you think it will be or hope it would be or expect it to be, and the question is: why? What went wrong, who's fault is it? And when you're choosing jeans from 2 different styles, The answer to the question : "what went wrong" is obvious. It's the worlds fault. They only make them in a couple of varieties what could I do? I did the best I could. But if you're choosing from 200 styles, and the result is unsatisfactory, and you ask the question "who's fault is it?" seems to be, the answer is again obvious. It's just different. Now the answer is "it's my fault." with 200 options, there's no excuse for anything less than perfection. So not only do people have ridiculously high expectations which are always which are almost never met, but then, when they aren't met, They attribute the responsibility for that failure to themselves. And self blame, I think is a critical component of why we are experiencing an epidemic of clinical depression in the United States. In a time when we've never been richer or had more freedom of choice, people seem to be getting sadder and sadder. There's one modifier I want to add. Because I think it's important, and that is that the problem of having too much choice is enormously exacerbated made worse, if you're the kind of person who thinks that the aim in a decision is to get the best, what we call "maximizing" The best job, the best cell phone, the best car, the best vacation, The best restaurant, the best dish in the restaurant, you're out to find he best. The alternative, is that you're out to find something that's good enough. and good enough can be very good. You can have high standards. Why does this make a difference? well, in a world of unlimited choice, how do you know you've got the best? You have to examine all the possibilities. But you can't examine all the possibilities, there are too many of them. So you examine a bunch and then you choose, and if it's in any way disappointing relative to expectations you'll just be convinced that a little looking a little longer in a different place, you would have done better. If you're out to get a good enough alternative, satisfice, Then you don't need to examine all the possibilities You just examine them one at a time, And when you find one that meets your standards, you choose it and you don't look back. So the difference between these two decision making styles is probably significant in general, but it becomes especially significant in a world where there are exceptionally unlimited options. This is an example of a maximiser, and here is a satisficer. And I studied whether this matters with a bunch of college seniors who were looking for jobs a few years ago. We started tracking them in October of their senior year and we stayed with them until June. And we were interested in how hard they found the decision, how many options they wanted, how well they did and how they felt about how well they did. And what we found in a nutshell is this: If you are a maximiser if you are out to get the best, You get a job with a starting salary that is 25% higher than if you are satisfied with good enough. Maximisers get better jobs. $7500 difference, 25% difference, that's a lot for a starting salary right out of college. You don't need this, so... But they are also more Pessimistic, anxious, stressed, worried, tired, overwhelmed, depressed, regretful and disappointed And they are less Content, optimistic, elated, excited, happy. In other words, they do better and they feel worse. Now we don't know how they feel when they're actually on the job, because, Because the study stopped before they had actually started working. But I have no reason to believe that it wouldn't be true of their experience on the job as it is of their experience of a starting salary. So, how can it be that choice can be good and bad? Because remember, I said, choice is good. Here's how. These people, Coombs and Avrunin wrote an article 30 years ago in which they argued, not about choice, about something else, that good feelings, good things satiate. And bad feelings escalate. So you know, you're eating a meal and the first few bites are spectacular, you keep eating, it's still delicious, but with each succeeding bite it gets a little bit delicious and a little bit less delicious and until you're not getting much of a kick out of your meal. meanwhile, something else is happening. And that is, you're starting to get full. First it's just mild, hardly noticeable, but by the time you get to your third course you're really kinda sagging, but your grandmother told you that people are starving in Africa, so you have to finish everything on your plate so you just keep eating and eating and eating. The pleasure is gone, the discomfort is getting worse and worse and worse. So this is exactly the way I envision choice. When you go from having no choice, like being really starving, to having some choice, it's all good. And the curve at the going up is the way I imagine what ha- What the dynamic is of the good characteristics of choices, So along the X axis is the number of choices, along the Y axis is subjective state, The line in the middle is neutral. So having no choice you feel infinitely bad, As I give you choice, there's a huge improvement in the well being, but eventually that curve levels off, and there are diminishing marginal returns to additional options. and eventually there are no returrns to additional options. It's flat. Meanwhile, all the stuff that I've been describing to you, Opportunity cost, regret, raised expectations, self blame, all of that gets bigger and bigger and bigger as the number of choices increases, and all of that ios negative. And that's what this curve is that starts out at 0 and goes down. And so, how you feel about your life with any given number of choices is simply the algebraic sum of those 2 processes. you're with me? And that's what it looks like. Why does it look like this? Cause I drew it. So I can make it look any damn way I want. But this sort of conceptually captures what I think is going on. A point is reached where there's no longer benefit to additional options, and there are very significant costs, very significant subjective psychological costs, and the costs can more than outweigh the benefits, so you end up feeling worse than neutral. Not simply worse than if you had fewer options but actually worse than neutral. And that's the state I think most- many, many people in the American society are in. There's a deep point in that curve, which almost all of social science ignores, and that is what we've called the "monotonicity" assumption. So people who do research assume, that the function relating X and Y goes in one direction. doesn't have to be a straight line but it doesn't change direction. So, you have one group that has no choice, and one group has a choice between 2 options, that group is happier than the one that has no choice, We don't need to study 3 options. Cause we know what that's gonna look like. Just keep on extrapolating the curve out. Now I say this, only because there were 50 years worth of studies comparing no options to 2 options. and it never occurred to anyone to look at 5 or 10 options. cause we knew what it would look like, and we just knew the wrong thing. Because the relation between choice and satisfaction is not monotonic. It changes direction at some point. Second principle that's worth paying attention to is what I call the "Leakage" principle, a very elegant name if you'll agree, and that is the context in which you make the decision will continue to exert its influence after the decision is made and you're actually experiencing the thing you've chosen. So the anguish you go through when choosing a car or a job or a spouse or a restaurant, doesn't stop when the choice is over, it's not like, ok, I've now got this car and I'm going to evaluate it on it's own terms. No. The effects, the comparisons that you are making while making the decision will continue to influence you as you experience the car, and the result is that you will like it less than you should. You will under appreciate it if you have tortured yourself in making the selection. This raises an interesting point that I think is directly relevant to the work you people do, and this is what economists refer to as the principal agent distinction. You know, principals are the people who are gonna experience the good, agents are the people who get it for them. So we have financial advisers who tell us what stocks to buy, insurance agents to tell us what insurance to get, real estate agents to tell us what house to buy, and so on. We are hiring their expertise. And that's what we think, that's why we think we're doing it. We're also hiring something else. And that is if you have an agent choosing your house, your car, your insurance, you don't have to make the comparisons. And what that means is that you won't suffer all of the effects of all of these choices. Because you only get to see the result. Your agent says " buy a Honda Civic" so you buy a Honda Civic. Your agent says " buy this 6.8 million dollar house up on the hill, it's a steal. For all I know, in this neighborhood, that would be a steal. So, the agent is the only one that's suffering, making all of these comparisons except it's not really suffering, cause the agent isn't going to experience whatever gets chosen. You are separating the choice from the experience, and as a result, you're making the person who is having the experience more satisfied than he or she would otherwise be. And the thing that I want to emphasize is that this is true even if your agent doesn't know one bit more about the thing than you do. The agent doesn't need to be an expert in order for you to benefit from the advice that the agent gives you. All the agent needs to do is not be a complete moron and actually be interested in in making you better off. And you will be better off, because you don't torture yourself over the decision. All that's done by somebody else. One view of what search engines can do or might do, for people, is that they act as agents. presenting results hiding all of the tortured comparisons that must be made in order to prioritize results So you only get to see the winner. And the result is that you appreciate the winner much more than you would if you had to do all those comparisons yourself. We're almost done. This is just to show you that there are companies that know this They have limited selection and they do very well, Costco, do they have Costcos out here? It started in Seattle, right? Costco is the store that people leave with the biggest smiles on their faces. That's the store people like to shop in most. Limited selection, good prices. And these little surprise things that they have for sale, these little affordable luxuries that you don't normally carry. Greek diners, in New York City. So, Greek diners, it's not like they have Greek food, they're just owned by Greek people, And their menus are about a thousand pages. There is no dish that anyone has ever eaten that isn't somewhere on those menus. And tucked on the front cover of the menu there's a little piece of paper clipped to the front of the menu with "Today's specials" 4-5 items. 2 things to know about today's specials, 1. They're the highest margin items. 2. They're the same every day. Inadvertently you create an insolvable problem by giving people 10.000 things to choose from and then you solve it for them by giving them "today's specials" And people are driven to choose take your advice, take your recommendation and choose today's specials, so, you know, they make a lot more money then they otherwise would, and they solve your choice problem, which of course they've created. Ok, last... substantive slide, and then I'll say just a word or two of how this might relate to you guys The more choices are available for people, the more likely it is that people will choose nothing. That they will be paralyzed. What do you do in the face of that paralysis? Paralysis can be extremely costly, sometimes you really should act. Richard Thalor, an economist and Care Sunstene a professor of law at the University of Chicago, have actually offered a guide for public policy Which they call libertarian paternalism. And the title of their paper is libertarian paternalism is not an oxymoron. Although it would seem to be. Now here's their argument. I'll give it to you with examples. Let's choose this one. In the United States when you renew your drivers licence, You get asked " would you like to be an organ donor?" 28% of American licensed drivers are organ donors. 85% of Americans think organ donation is a good thing. 28% of licensed drivers are organ donors. Several different European countries, they do the same thing when you renew your drivers licence you get the opportunity to be an organ donor, and in these countries 90% of licensed drivers are organ donors. 28% in the US, 90% in these European countries what's the difference? Europeans are nicer than Americans, I don't think so. Opt in vs Opt out. In Europe, you're an organ donor unless you say no, in the United states, you're not an organ donor unless you say yes. Now, understand that either way all you have to do is check a box and sign a form. This is not exactly rocket science. Nonetheless, with a high likelihood that people will do nothing, Thalor and Sunstene argue Organize options, so that if people do nothing, They get what is almost certainly in their interest. That's the paternalistic part. The libertarian part is you do give them the opportunity to say no. With respect to 401(k) participation, same story. Almost all of the workplaces in the United States you have to sign a form that says: withhold 5% of my pay and put it into something and if you don't nothing is withheld, suppose you reverse that, and the form says don't deduct 5% of my pay. I want every bloody penny of it. You dramatically increase the rate of participation in 401(k)s. And we have a good reason to believe that this paternalistic manipulation of what the default is, is is actually doing what people want, because as I say, 85% of Americans support organ donation and virtually everybody ends up participating in the 401(k). So all you're doing is inducing them to do it a little bit sooner. So in a world in which people are more and more likely because of the overwhelmingly large number of choices they face and the complexity of life to do nothing. The most useful thing that policy can do, is organize the space so that when they do nothing good things happen. And will have as big of an effect on the character of a variety of American social institutions a bigger effect than anything I can think of, and it's free. Essentially free. So it is worth thinking long and hard about what the defaults should be, so that people are mostly satisfied with what happens to them if they don't do anything I already said this I think the capability/usability problem is relevant to you, but you know better than I how to how you face it and how you would solve it I must say, I like a lot that you give people what do they- what do you call it? Packets? Pack instead of letting people choose one from column A and two from column B you say, if I were you , I'd say it a lot harder, I'd say listen, this is what we think you should have click and you've got it. instead of just saying " you can have it" all if you want it. Urge people to want it, we know more than you do this is what you should have. Structure our options hierarchically, a way of reducing our choice paralysis, is to give people a choice among 4 or 5 options. and then once they, you know, create trees create trees intelligently so that people never have to go back up the tree realizing that they've gone down the wrong branch. I know this isn't easy but this is gonna be a lot more satisfying and usable for people than presenting 125 options all at once. And is worth paying a lot of attention to how people use your products to know just how these trees should be structured so that you never feel like you're choosing among a very large set of options. I get the feeling that there's nothing I can say that you haven't already thought about in this connection, but what the hell. I'll say it anyway. I believe that for the most part, You people are part of the solution,rather than part of the problem, to pull a slogan from the 60's out of my back pocket. And that's something that you should be very pleased about and I'm certainly thrilled to death that you exist. Because you're certainly part of the solution and not part of the problem in my world although there is one thing I'd like you to fix that we can talk about later. But I don't think there's anything inevitable about this, I think that you remain part of the sollution rather than becoming part of the problem only if you are deliberately and self consciously trying to be part of the solution. There's enormous pressure to move in other directions where you will confuse muddle and frustrate people rather than rather than serving them and with your eye clearly on the prize and on how much people need to be guided by the kind of information you offer, you can resist the pressure that you may experience some day in the future to be something different than what you set out to be. So, thank you very much.

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Duration: 1 hour, 4 minutes and 7 seconds
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Posted by: qwertyfans on Jun 9, 2009

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