The Paradox of Choice

Yesterday I saw two demonstrations of  Barry Schwartz’s Paradox of Choice in action. This is one of the most useful books about decision making that I have found, and is a must read for anyone in marketing.

Jeff Bussgang asked why everyone still uses 4 year vesting schedules at startups when, in the current economy, exits usually take longer. For those that don’t speak VC – employees at startups get shares of the company, usually granted in 25% chunks at the first four anniversary dates – to encourage them to stay four years and get all their shares. (Shameless plug – if you want to learn more about how to speak VC, check out the Marketing Over Coffee interview with Jeff that will be posted the first week in June)

It’s a good argument, but as you can see from the post it has generated many comments – and this goes right to the Paradox of Choice. The more alternatives someone faces when making a decision, the less likely they will make a decision.

This is most easily demonstrated at a store I go to during the summer in Northern Michigan. They sell different kinds of jam and jellies, and they have about a dozen of them out to taste test, and that’s a problem. If there were two out you would like one better than the other, and maybe buy it. An Economist can mathematically represent this, they use a unit called Utils (rhymes with noodles) to measure the benefit of making a purchase. Bob really likes Jelly A, buying it gives him +5 utils, he does not like Jelly B, buying it would not give him any utils. 5 utils beats the 4 util cost of giving up the $7 to buy it, so he does. His day is now 1 util up with his jelly, the store owner closed a sale, and there is much rejoicing.

Things get more complex when Jelly C is added to the table. Bob likes it, but not as much as Jelly A, he only thinks it’s about +3 utils. Here’s the problem – let’s also say that Bob will only buy one jelly because he knows that even one is really too much and it will sit in his fridge for a year and he will throw half of it out when it’s moldy.

With the third jelly on the table, now if Bob buys Jelly A he’s going to take a hit of -1 util for the regret of passing up Jelly C, which he also liked (but not enough to give up Jelly A). A buyer will be less satisfied with their purchase if they have to rule out alternatives. You can see where this goes, by the time the store owner puts Jelly K (the 11th jar of jelly) on the sample table, the psychological baggage of having to make a decision, including the negative impact of the foregone alternatives actually outweighs the pleasure of making a purchase.

So, changing a 4 year vesting schedule is an interesting idea, but is opens a world filled with alternatives. Unless any of these options are REALLY great (unintended VC pun), the odds are good that no decision will be made. This is the basis for all the stats you hear about having to be 10x better than a competitor to win customers away from them. If you only have one or two features that are better than the competition, odds are that’s not enough to get them to wade through all the work of making a decision (“switching costs” in Economese, which can be real dollars or just psychological labor).

At the other end of the spectrum, @cc_chapman generated some heat admitting that he’s never been to a Trader Joe’s. Many fans of the store cite the quality of the goods, the low cost, the selection. There’s one factor that’s consistently misunderestimated (yes, both): choice is often removed from the equation.  Schwartz gives the example in the book of 85 types of crackers at the local supermarket, again the weight of the decision making baggage. There are some items at Trader Joe’s that have only one option, from there the benefits pile up: smaller footprint for the store, more efficient use of space, more types of products, ability to cut the best deal by limiting suppliers.

And so, as my Friday begins I offer two pieces of unsolicited advice: read Paradox of Choice (and use that link so I get my affiliate kickback), and to C.C. (and everyone else), get the frozen Tuna Steak from Trader Joe’s, thaw it, throw a cast iron pan on to your grill on high to warm for 10 minutes, throw on half a stick of butter and blacken the steaks with a dry rub. Add your favorite beer and enjoy the long weekend.