When behavioral biases meet the market

Have you ever gone shopping, only to be overwhelmed by the number of options available to choose from?  You're not alone.  In fact, psychologists have created a name for the phenomenon: the "excessive choice effect."  In one of the more famous studies on the topic, aptly titled "When choice is demotivating", the authors found that when consumers were offered the opportunity to buy an exotic jam, 30% bought when only 6 varieties were presented.  However, only 3% of consumers bought when 24 variety were presented.  On the face of it, this seems to violate basic economic logic: when there are more varieties available, there is a greater likelihood of finding one you like, and thus there should be a higher likelihood of purchase.  

These sorts of findings have led to popular books (like this one titled The Paradox of Choice) and some bold claims that we'd all be happier and our society would have less depression if we (or namely the government) restricted our choice and freedom.  

Well, as it turns out, subsequent studies found that the "excessive choice effect" doesn't always exist, and the phenomena is much more nuanced than first suggested.  

Now, enter of of my Ph.D. students, Trey Malone (who is on his way to an assistant professor position at Michigan State University).  Our co-authored paper on this topic was just released by the Journal of Behavioral and Experimental Economics.  Trey's insight was this: if the "excessive choice effect" (or ECE) exists, surely companies will want to do something about it.  It's bad business to present consumers with so many options that they don't make a purchase.  Yet, in many markets (and in particular in the market for craft beer which was the focus of our study), there is an apparent explosion of variety of choice.  What's going on?  

From the paper:

In a competitive market, the choice architecture is endogenous, and sellers compete to provide environments that consumers find appealing, thereby increasing profits. In such cases, the market, at least partially, provides incentives to ameliorate the ECE by, for example, reducing search costs for consumers (e.g., see Kamenica, 2008; Kuksov and Villas-Boas, 2010; Norwood, 2006). This raises the possibility that ECE may arise in laboratory contexts or oneshot field experiments while at the same time having limited relevance in day-to-day business decisions. Whereas prior research mainly focus on the identification of an ECE, we show that sellers have access to market-specific mechanisms (or informational nudges) that narrow its influence. We demonstrate that if the ECE exists, sellers can mitigate or exasperate its negative effects through targeted interventions.

The interventions (or private nudges) that we consider were beer sellers providing consumers more information about the varieties either through a "special" or the provision of beer advocacy scores.  

Trey worked with a local wine bar in town to run field experiments. Unbeknownst to the patrons, we strategically varied the number of options on the beer menu over time.  The menu either presented 6 or 12 options (note that the menu of 12 included all 6 of the varieties on the smaller menu).  And, we also varied information about the beers as previously indicated, sometimes there was no extra information (the control) and other times we tried to reduce search costs by labeling one of the options a "special" or by providing beer advocacy scores for each option (these are akin to a quality rating by a reliable third party).  

The results are summed up in the following graph:

Thus, we found that the excessive choice effect was alive and well in a real-life purchase setting (people were more likely to NOT buy a beer when there were 12 options as compared to 6), but only when no extra information was provided.  The effect reversed itself when the menu included beer advocate scores. These results show how the excessive choice effect might be turned on and off by companies manipulating search costs.  

One of the main lessens here is that it would be a mistake to take a finding of a supposed "behavioral bias" (like the excessive choice effect) in a laboratory experiment to make grand claims for large government interventions without also considering how consumers and businesses themselves might react to those very same biases in the course of everyday life.