According to standard economic assumptions, the only opportunity costs that should figure into a decision are the ones associated with the next-best alternative. So let’s say your options for next Saturday night, listed in order of preference, include:
Dinner in a nice restaurant
A quick dinner and a movie
Music at a jazz club
Dancing
Cooking dinner for a few friends
Going to a baseball game
If you go for the dinner, the “cost” will be whatever you pay for the meal, plus the passed up opportunity to see a movie. According to economists, that’s where your “cost accounting” should stop. Which is also excellent advice for managing our own psychological response to choice. Pay attention to what you’re giving up in the next-best alternative, but don’t waste energy feeling bad about having passed up an option further down the list that you wouldn’t have gotten to anyway.
This advice, however, is extremely difficult to follow, and here’s why: The options under consideration usually have multiple features. If people think about options in terms of their features rather than as a whole, different options may rank as second best (or even best) with respect to each individual feature. So going to the movies may be the best way to stimulate the intellect. Listening to jazz may be the best way to relax. Dancing may be the most enjoyable way to get some exercise. Going to the ball game may be the best way to blow off some steam. Dinner at home with friends may be the best way to experience intimacy. Even though there may be a single, second-best option overall, each of the options you reject has some very desirable feature on which it beats its competition. So going out to dinner then means giving up opportunities to be intellectually stimulated, to relax, to get exercise, to blow off steam, and to experience intimacy. Psychologically, each alternative you consider may introduce still another opportunity you’ll have to pass up if you choose your preferred option.
If we assume that opportunity costs take away from the overall desirability of the most-preferred option and that we will feel the opportunity costs associated with many of the options we reject, then the more alternatives there are from which to choose, the greater our experience of the opportunity costs will be. And the greater our experience of the opportunity costs, the less satisfaction we will derive from our chosen alternative.
Why can’t there be a job that offers a good salary, opportunities for advancement, a friendly work environment, an interesting location that has a job for my partner, and proximity to my family? Why can’t there be a vacation where I get the beach and great restaurants, shops, and tourist sights? Why can’t I have an intellectually stimulating, relaxed, physically active, and intimate night with friends? The existence of multiple alternatives makes it easy for us to imagine alternatives that don’t exist—alternatives that combine the attractive features of the ones that do exist. And to the extent that we engage our imaginations in this way, we will be even less satisfied with the alternative we end up choosing. So, once again, a greater variety of choices actually makes us feel worse.
If there were some way to say, objectively, what was the best vacation or the best job or the best way to spend a Saturday night, then adding options could only make people better off. Any new option might turn out to be the best one. But there is no objective best vacation, job, or Saturday night activity. Ultimately, the quality of choices that matters to people is the subjective experience that the choices afford. And if, beyond a certain point, adding options diminishes our subjective experience, we are worse off for it.
The Psychology of Trade-offs
THE PSYCHOLOGY OF TRADE-OFFS HAS BEEN INVESTIGATED IN A series of studies in which participants are asked to make hypothetical decisions about which car to buy or which apartment to rent or which job to take, based on a range of features, including price. The lists of alternatives are constructed so that in choosing one option, the participants will have to make trade-offs. In choosing a car, for example, one option may be more stylish but have fewer safety features than another. In choosing an apartment, one option may offer better space than another but in a less convenient location.
In one study, participants were told that Car A costs $25,000 and ranks high in safety (8 on a 10-point scale). Car B ranks 6 on the safety scale. Participants were then asked how much Car B would have to cost to be as attractive as Car A. Answering this question required making a trade-off, in this case, between safety and price. It required asking how much each extra unit of safety was worth. If someone were to say, for example, that Car B was only worth $10,000, they would clearly be placing great value on the extra safety afforded by Car A. If instead they were to say that Car B was worth $22,000, they would be placing much less value on the extra safety afforded by Car A. Participants performed this task with little apparent difficulty. A little while later, though, they were confronted with a second task. They were presented with a choice between Car A, safety rating 8 and price of $25,000, and Car B, safety rating 6, and the price that they had previously said made the two cars equally attractive. How did they choose between two equivalent alternatives?
Since the alternatives were equivalent, you might expect that about half the people would choose the safer, more expensive car and half would choose the less safe, cheaper car. But that is not what the researchers found. Most participants chose the safer, more expensive car. When forced to choose, most people refused to trade safety for price. They acted as if the importance of safety to their decision was so great that price was essentially irrelevant. This choice was clearly different from the way people reacted to the task in which they had to establish a price that would make the two cars equivalent. If they had thought that safety was of overriding importance, they would have set the price of Car B very low. But they didn’t. So it wasn’t that people refused to “put a price” on safety. Rather, when the time came to make the choice, they were simply unwilling to live by the price on safety that they had already established.
Even though their decision was purely hypothetical, participants experienced substantial negative emotion when choosing between Cars A and B. And if the experimental procedure gave them the opportunity, they refused to make the decision at all. So the researchers concluded that being forced to confront trade-offs in making decisions makes people unhappy and indecisive.
It isn’t hard to understand this pattern. Imagine yourself choosing the less safe of two cars to save $5,000, only to have a major car accident later on. Could you live with yourself if it turned out that one of your loved ones would have been spared serious injury if you’d been driving a safer car? Of course you’re reluctant to trade off safety for price. Of course safety has overriding importance. But this is a very special case.
Not so, it seems. Participants in these studies showed the pattern of reluctance to make trade-offs whether the stakes were high or low. Confronting any trade-off, it seems, is incredibly unsettling. And as the available alternatives increase, the extent to which choices will require trade-offs will increase as well.
Avoiding Decisions
WHAT, THEN, DO PEOPLE DO IF VIRTUALLY ALL DECISIONS INVOLVE trade-offs and people resist making them? One option is to postpone or avoid the decision. Imagine being in the market for a new music system and seeing a sign in a store window announcing a one-day clearance sale on CD players. You can get a popular Sony CD player for only $99, well below list price. Do you buy it, or do you continue to research other brands and models? Now imagine that the sign in the window offers both the $99 Sony and a $169 top-of the-line Aiwa, also well below list price. Do you buy either of them, or do you postpone the decision and do more research?
When researchers asked, they found an interesting result. In the first case, 66 percent of people said they would buy the Sony and 34 percent said they would wait. In the second case, 27 percent said they would buy the Sony, 27 percent said they would buy the Aiwa, and 46 percent said they would wait. Consider what this means. Faced with one attractive optio
n, two-thirds of people are willing to go for it. But faced with two attractive options, only slightly more than half are willing to buy. Adding the second option creates a conflict, forcing a trade-off between price and quality. Without a compelling reason to go one way or the other, potential consumers pass up the sale altogether. By creating the conflict, this second option makes it harder, not easier to make a choice.
Consumers need or want reasons to justify choices, as we see in a third hypothetical situation. A similar one-day sale offers the $99 Sony and an inferior Aiwa at the list price of $105. Here, the added option does not create conflict. The Sony is better than the AIWA and it’s on sale. Not surprisingly, almost no one chooses the Aiwa. Surprisingly, however, 73 percent go with the Sony, as opposed to 66 percent when it was offered by itself. So the presence of a clearly inferior alternative makes it easier for consumers to take the plunge. Perhaps seeing the inferior Aiwa bolsters people’s confidence that the Sony is really a good deal, though in a market with dozens of brands and models of CD players available, the presence of this second alternative doesn’t really prove much. Even if inferior in every way, the second alternative provides an anchor or comparison that bolsters a buyer’s reasons for choosing the first one (see Chapter 3). It helps buyers conclude that the Sony option is of good quality at a good price. Difficult trade-offs make it difficult to justify decisions, so decisions are deferred; easy trade-offs make it easy to justify decisions. And single options lie somewhere in the middle.
Conflict induces people to avoid decisions even when the stakes are trivial. In one study, participants were offered $1.50 for filling out some questionnaires. After the participants had finished, they were offered a fancy metal pen instead of the $1.50 and told that the pen normally costs about $2. Seventy-five percent of people chose the pen. In a second condition, participants were offered the $1.50 or a choice between that same metal pen and two less-expensive felt-tipped pens (also worth about $2). Now fewer than 50 percent chose either of the pens. So the conflict introduced by the added option made it difficult to choose one pen or the other, and the majority of participants ended up choosing neither. It is hard to imagine why adding the pair of cheaper pens to the mix should do anything to alter the value of the good pen in comparison with $1.50. If 75 percent of people think the good pen is a better deal than $1.50 in the first case, then 75 percent ought to think so in the second case as well. And there ought to be some people who think that getting two pens is a better deal. So more people, not fewer, ought to be going with the pens rather than the cash when they have a choice. But the opposite occurs.
There is another, more urgent example of how conflict induces people to avoid decisions. In this study, doctors were presented with a case history of a man suffering from osteoarthritis and asked whether they would prescribe a new medication or refer the patient to a specialist. Almost 75 percent recommended the medication. Other doctors were presented with a choice between two new medications or referral to a specialist. Now only 50 percent went with either of the medications, meaning that the percentage of those referring doubled. Referral to a specialist is, of course, a way to avoid a decision.
Similarly, legislators were presented with a case that described a struggling public hospital and asked whether they would recommend closing it. Two-thirds of the legislators recommended shutting it down. Other legislators were presented with a similar case with a new wrinkle, the added possibility of closing a second struggling hospital. When asked which of the two they would prefer to close (they also could choose to make no recommendation), only a quarter of the legislators recommended shutting either of them. Based on these studies, and others like them, researchers concluded that when people are presented with options involving trade-offs that create conflict, all choices begin to look unappealing.
People find decision making that involves trade-offs so unpleasant that they will clutch at almost anything to help them decide. Consider this scenario from another study:
Imagine that you serve on the jury of an only-child, sole-custody case following a relatively messy divorce. The facts of the case are complicated by ambiguous economic, social, and emotional considerations, and you decide to base your decision entirely on the following few observations:
Parent A
Parent B
Average income
Above-average income
Average health
Minor health problems
Average working hours
Lots of work-related travel
Reasonable rapport with child
Very close relationship with the child
Relatively stable social life
Extremely active social life
To which parent would you award sole custody of the child?
Faced with this scenario, 64 percent of respondents chose to award the child to Parent B. Whereas Parent A was sort of average in every way, Parent B had two very positive features and three negative ones, and for most people, the positives outweighed the negatives.
Or did they? Another group of respondents was given exactly the same information as the first, but asked a slightly different question: Which parent would you deny sole custody of the child? With the judgment framed in this negative language, the percentage of those voting for the child to go to B dropped from 64 percent to 55 percent.
Difficult choices like this one set people off on a chase for reasons to justify their decisions. What kinds of reasons are they looking for? In the first instance, they are looking for reasons to accept a parent. And Parent B offers them: high income and a close relationship. In the second instance, people are looking for reasons to reject a parent. Parent B offers these as well: health problems, work travel, too much socializing. Respondents cling to the form of the question (“award” or “deny”) as a guide to the kinds of reasons they will be looking for. It’s one way to reduce or avoid conflict. If you’re looking only at the negatives, then you don’t have to worry about trade-offs with the positives.
Decision conflict is an important ingredient in the examples of decision avoidance that I’ve just described, but it isn’t the only ingredient. Think about trying to decide whether to buy a digital camera with your year-end bonus. A digital camera will allow you to manipulate the images you capture and send them easily to friends and family, both of which attract you. Is it worth the money? You think about it for a while and decide. Now imagine trying to decide whether to buy a mountain bike with your bonus. You love to ride for exercise, especially in the hills outside the town in which you live. Is it worth the money? You think about it for a while and decide. Now imagine trying to decide whether to buy a mountain bike or a digital camera. Each option represents a gain (positive features it has that the other doesn’t) and a loss (positive features it doesn’t have that the other does). We saw in Chapter 3 that people tend to display loss aversion. The loss of $100 is more painful than the gain of $100 is pleasurable. What that means is that when the mountain bike and the digital camera are compared, each will suffer from the comparison. If you choose the camera, you’ll gain the quality and convenience of digital photography but lose the exercise in lovely surroundings. Because losses have a greater impact than gains, the net result will be that the camera fairs less well when compared with the mountain bike than it would have if you were evaluating it on its own. And the same is true of the mountain bike. Once again, this suggests that whenever we are forced to make decisions involving trade-offs, we will feel less good about the option we choose than we would have if the alternatives hadn’t been there.
This was confirmed by a study in which people were asked how much they would be willing to pay for subscriptions to popular magazines or to purchase videotapes of popular movies. Some were asked about individual magazines or videos. Others were asked about these same magazines or videos as part of a group with other magazines or videos. In almost every case, respondents placed a higher value on the magazine or the video when they were evaluating it in isolation than wh
en they were evaluating it as part of a cluster. When magazines are evaluated as part of a group, each of them will both gain and lose from the comparisons. And because the losses will loom larger than the gains, the net result of the comparison will be negative. Bottom line—the options we consider usually suffer from comparison with other options.
Trade-offs: Emotional Unpleasantness Makes for Bad Decisions
JUST ABOUT EVERYONE SEEMS TO APPRECIATE THAT THINKING about trade-offs makes for better decisions. We want our doctors to be weighing trade-offs before making treatment recommendations. We want our investment advisers carefully considering trade-offs before making investment recommendations. We want Consumer Reports to evaluate trade-offs before making purchasing recommendations. We just don’t want to have to evaluate trade-offs ourselves. And we don’t want to do it because it is emotionally unpleasant to go through the process of thinking about opportunity costs and the losses they imply.
The emotional cost of potential trade-offs does more than just diminish our sense of satisfaction with a decision. It also interferes with the quality of decisions themselves. There is a great deal of evidence that negative emotional states of mind narrow our focus. Instead of examining all aspects of a decision, we home in on only one or two, perhaps ignoring aspects of the decision that are very important. Negative emotion also distracts us, inducing us to focus on the emotion rather than on the decision itself. As the stakes of decisions involving trade-offs rise, emotions become more powerful, and our decision making can be severely impaired.
The Paradox of Choice Page 11