Choices and Decision Making – essential for business as well as life 1/2
Basis for this article are the great and practical TED Talk by Dan Gilbert – Why we make bad decisions and the notes of Derek Sivers to Barry Schwartz´ book “The Paradox of Choice”.
I´ll split this article in two different ones – one is about choices, decision making and consumer behaviors and the next one is a bit more specific about how we can improve ourselves and which kind of “decision maker” are we actually?
Decision making is absolutely important for business as well as for our everyday life. Gilbert and Sivers give us a great perspective of “choices” and why lots of choices are more difficult than limited choices.
With limitless choice, we produce better results with our decisions than we would in a more limited world, but we feel worse about them.
There is no denying that choice improves the quality of our lives. It enables us to control our destinies and to come close to getting exactly what we want out of any situation. But as the number of choices keeps growing, negative aspects of having a multitude of options begin to appear. As the number of choices grows further, the negatives escalate until we become overloaded. At this point, choice no longer liberates, but debilitates.
In 1738 a Dutch polymath named Daniel Bernoulli shared an easy explanation about how to make decisions which is just not that easy as he named it: Expected Value = Odds of Gain X Value of Gain. Bernoulli was saying that if we can estimate and multiply these two things, we will always know precisely how we should behave. But in fact it is not very simple in everyday life.
There are lots of studies about how people react when they have to many choices:
When given free samples of jams in a store, 30% of people exposed to 6 jams bought a jar. Only 3% of people exposed to 24 jams bought a jar.
A large array of options discourages customers because it forces an increase in the effort that goes into making a decision. So consumers decide not to decide.
What is also really interesting for business ist he fact you use limited choices to influence consumer´s buying decisions.
Any particular item will always be at the mercy of the context in which it is found. A store sold a bread-maker for $279. Later, they added a deluxe version for $429. They didn’t sell many of the expensive ones, but sales of the less expensive one doubled! The $279 now looked like a bargain. Even if companies sell almost none of the highest-priced models, they can reap enormous benefits from producing such models because they help induce people to buy their cheaper (but still expensive) ones.
Being forced to confront trade-offs in making decisions makes people unhappy and indecisive.
Story of retail situation:
:: One Sony CD player for $99, far below list price
66% of people said they’d buy it. 34% would wait.
:: Two CD players: Sony for $99 and $169 top-of-the-line Aiwa, both below list price
27% would buy the Sony, 27% would buy the Aiwa, 46% would wait.
:: Sony CD player at $99 and a clearly inferior Aiwa at $105
73% go with the Sony, almost nobody goes for the Aiwa
So… Faced with one attractive option, 66% of people will go for it. But add one conflicting option, and only 50% buy anything.
Adding the 2nd option creates a conflict, forcing a trade-off between price and quality. The 2nd option made it harder, not easier, to choose.
But in the 3rd scenario, the crappy Aiwa gave people confidence that the Sony is a good deal – an anchor of comparison that bolsters a buyer’s reasons for buying the Sony.
Also pretty interesting is the fact that more than 50 % of people chose options that give them better relative positions like earning 50k/year while others around are earning 25k/year is better than earning 100k/year while others around are earning 200k/year.
Similar to this is when people are asked about two different jobs. A job where we make 60K, then 50K, than 40K, and another one in which we are getting a salary increase. People like the second job better than the first, despite the fact they are all told they make much less money. They have the sense that declining wages are worse than rising wages, even when the total amount of wages is higher in the declining period.
Dan Gilbert gives another great example about a simple lottery. There are 10 tickets in this lottery. 9 of them have been sold to these individuals. It costs you a dollar to buy the ticket and if you win you get 20 dollars. The expected value (like the Bernoulli formula in the beginning) is 2 dollars – so it is a good lottery. Now imagine the nine tickets are all owned by one guy to give a slightly different version. The odds of winning haven´t changed but it is now easy to imagine who is going to win. Now we can´t say anymore “I´m as likely to win as anybody” because we are not as likely to win as Leroy. This fact changes the decision to play in most cases.
This is also important for Marketing. Gilbert gives another clear example:
Here’s a $2,000 Hawaiian vacation package; it’s now on sale for 1,600. Assuming you wanted to go to Hawaii, would you buy this package? Most people say they would. Here’s a slightly different story: $2,000 Hawaiian vacation package is now on sale for 700 dollars, so you decide to mull it over for a week. By the time you get to the ticket agency, the best fares are gone — the package now costs 1,500. Would you buy it? Most people say, no. Why? Because it used to cost 700, and there’s no way I’m paying 1,500 for something that was 700 last week.
This tendency to compare to the past is causing people to pass up the better deal. In other words, a good deal that used to be a great deal is not nearly as good as an awful deal that was once a horrible deal.
Comparison changes the value of things.
You want to buy a car stereo. The dealer near your house sells this particular stereo for 200 dollars, but if you drive across town, you can get it for 100 bucks. So would you drive to get 50 percent off, saving 100 dollars? Most people say they would. They can’t imagine buying it for twice the price when, with one trip across town, they can get it for half off.
Now, let’s imagine instead you wanted to buy a car that had a stereo, and the dealer near your house had it for 31,000. But if you drove across town, you could get it for 30,900. Would you drive to get it? At this point, 0.003 savings — the 100 dollars. Most people say, no, I’m going to schlep across town to save 100 bucks on the purchase of a car?
Now you got quite a few practical examples to see how people make decisions and how we can influence decisions with choices.
I´ll do another article – the second part- to this topic at the end of the week with some more detailed information about how we can find out which kind of decider we are and how we can handle decision making.