In the 21st century economy, consumers have never had so many choices. That's a good thing, right?
Maybe not. Some of us begin to feel overwhelmed when we have to choose a new cell phone plan or a new health insurance policy. Economists have a term for it – choice overload – and say it can cause frustration and ultimately lead to poor choices.
“Standard economic theory will tell you that more choice is always better,” said Tibor Besedes, an associate professor in the School of Economics at Georgia Tech. “Theoretically, that works out, but when you have to apply it, that’s very different. When you give people a lot of options, they can get bogged down and, at some level, become unwilling to consider anything because it just gets too complicated.”
Researchers devised 3 strategies to help consumers cope with choice overload and tested them on a group of volunteers. The consumers in the study had to choose from among 16 options.
The first strategy was to consider all 16 choices at the same time. The second was called “sequential elimination,” beginning with choosing one option from among four choices. Three additional choices were then added to the one chosen from the first group, and the process continued through five rounds until all but one option was eliminated.
The third strategy was called “sequential tournament.” Four groups of 4 options were randomly chosen by a computer and the subjects were asked to choose 1 option from each group. The “winning” options chosen from the first four groups were then put into a finalist group from which the final selection was made.
The consumers taking part in the experiment liked the tournament strategy the least. But oddly, the researchers found it produced the best choices. One reason for its lack of popularity, they speculate, is that off all 3 methods, it required the most time to arrive at a decision.
Why it works
But here's why it works: when you consider fewer options, you tend to make a better decision. By considering only 4 options at a time, researchers say the consumers had a better chance of arriving at the right choice.
Considering all 16 options at 1 time, on the other hand, was the favorite method of consumers in the test group but produced the worst results.
“We know from all the studies that we’ve done that if you have a smaller choice set, you tend to do better,” Besedes said. “There is a lot of information that you have to go through, and you have to understand what all of those things mean, and from that information, figure out what’s best for you. You can’t do that while choosing from 16 options at a time.”
The study was spurred by concerns over the large number of choices seniors had to make in the Medicare Part D program. But the results suggest the successful choice screening method could be used for choosing retirement programs, health care insurance, automobiles, homes, cell phones and other products or services.
Why choices matter
“The difference between choosing a Medicare Part D plan and picking a cell phone is that the cell phone decision is less important financially,” Besedes said. “If you choose the wrong retirement or prescription drug plan, the cost of making a mistake can be considerable. And by the time you realize you’ve made a mistake, it may be too late to correct it.”
Besedes offers advice to anyone trying to choose from many options:
- Divide the options into piles of four
- Choose the best option from each pile
- Put the winners from the first round into a new finalist pile
- Choose the best option from winners of the earlier four selections.