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Wednesday, November 22, 2017

The Paradox of Choice
By Barry Schwartz, New York: HarperCollins, 2004

(page 18)

Americans spend more time shopping than the members of any other society. Americans go to shopping centers about once a week, more often than they go to houses of worship, and Americans now have more shopping centers than high schools. In a recent survey, 93 percent of teenage girls surveyed said that shopping was their favorite activity. Mature women also say they like shopping, but working women say that shopping is a hassle, as do most men. When asked to rank the pleasure they get from various activities, grocery shopping ranks next to last, and other shopping fifth from the bottom. And the trend over recent years is downward. Apparently, people are shopping more but enjoying it less.

 

There is something puzzling about these findings. It's not so odd, perhaps, that people spend more time shopping than they used to. With all the options available, picking what you want takes more effort. But why do people enjoy it less? And if they do enjoy it less, why do they keep doing it? If we don't like shopping at the supermarket, for example, we can just get it over with, and buy what we always buy, ignoring the alternatives. Shopping in the modern supermarket demands extra effort only if we're intent on scrutinizing every possibility and getting the best thing. And for those of us who shop in this way, increasing options should be a good thing, not a bad one.

 

And this, indeed, is the standard line among social scientists who study choice. If we're rational, they tell us, added options can only make us better off as a society. Those of us who care will benefit, and those of us who don't care can always ignore the added options. This view seems logically compelling; but empirically, it isn't true.

 

A recent series of studies, titled "When Choice Is Demotivating, provide the evidence. One study was set in a gourmet food store in an upscale community where, on weekends, the owners commonly set up sample tables of new items. When researchers set up a display featuring a line of exotic, high-quality jams, customers who came by could taste samples, and they were given a coupon for a dollar off if they bought a jar. In one condition of the study, 6 varieties of the jam were available for tasting. In another, 24 varieties were available. In either case, the entire set of 24 varieties was available for purchase. The large array of jams attracted more people to the table than the small array, though in both cases people tasted about the same number of jams on average. When it came to buying, however, a huge difference became evident. Thirty percent of the people exposed to the small array of jams actually bought a jar; only 3 percent of those exposed to the large array of jams did so.

 

In a second study, this time in the laboratory, college students were asked to evaluate a variety of gourmet chocolates, in the guise of a marketing survey. The students were then asked which chocolate – based on description and appearance – they would choose for themselves. Then they tasted and rated that chocolate. Finally, in a different room, the students were offered a small box of the chocolates in lieu of cash as payment for their participation. For one group of students, the initial array of chocolates numbered 6, and for the other, it numbered 30. The key results of this study were that the students faced with the small array were more satisfied with their tasting than those faced with the large array. In addition, they were four times as likely to choose chocolate rather than cash as compensation for their participation.

 

(page 22)

Filtering out extraneous information is one of the basic functions of consciousness. If everything available to our senses demanded our attention at all times, we wouldn't be able to get through the day.

 

(page 25)

In discussing the introduction of electric power competition in New York, Edward A. Smeloff, a utility industry expert, said, "In the past we trusted that state regulators who were appointed by our elected officials were watching out for us, which may or may not have been true. The new model is, ‘Figure it out for yourself.' Is this good news or not? According to a survey conducted by Yankelovich Partners, a majority of people want more control over the details of their lives, but a majority of people also want to simplify their lives. There you have it – the paradox of our times.

 

As evidence of this conflicted desire, it turns out that many people, though happy about the availability of telephone choices or electric choices, don't really make them. They stick with what they already have without even investigating alternatives. Almost twenty years after phone deregulation, AT&T still has 60 percent of the market, and half of its customers pay the basic rates. Most folks don't even shop around for calling plans within the company. And in Philadelphia, with the recent arrival of electricity competition, only an estimated 15 percent of customers shopped for better deals. You might think that there's no harm in this, that customers are just making a sensible choice not to worry. But the problem is that state regulators aren't there any more to make sure consumers don't get ripped off. In an era of deregulation, even if you keep what you've always had, you may end up paying substantially more for the same service.

 

(page 32)

The uncertainties were savage, and I could not bear the possibility of making the wrong call. Even if I made what I was sure was the right choice for her, I could not live with the guilt if something went wrong…I needed Hunter's physician to bear the responsibility; they could live with the consequences, good or bad.

 

Gawande reports that research has shown that patients commonly prefer to have other make their decisions for them. Though as many as 65 percent of people surveyed say that if they were to get cancer, they would want to choose their own treatment. In fact, among people who do get cancer, only 12 percent actually want to do so.

 

(page 34)

As journalist Wendy Kaminer puts it, "Beauty used to be a gift bestowed upon the few for the rest of us to admire. Today it's an achievement, and homeliness is not just misfortune but a failure.

 

(page 49)

Nobel Prize-winning psychologist Daniel Kahneman and his colleagues have shown that what we remember about the pleasurable quality of our past experiences is almost entirely determined by two things: how the experiences felt when they were at their peak (best or worst), and how they felt when they ended. This "peak-end rule of Kahneman's is what we use to summarize the experience, and then we rely on that summary later to remind ourselves of how the experience felt.

 

Here's an example. Participants in a laboratory study were asked to listen to a pair of very loud, unpleasant noises played though headphones. One noise lasted for eight seconds. The other lasted sixteen. The first eight seconds of the second noise were identical to the first noise, whereas the second eight seconds, while still loud and unpleasant, were not as loud. Later the participants were told that they would have to listen to one of the noises again, but that they could choose which one. Clearly the second noise is worse – the unpleasantness lasted twice as long. Nonetheless, the overwhelming majority of people chose the second to be repeated. Why? Because whereas both noises were unpleasant and had the same aversive peak, the second had a less unpleasant end, and so was remembered as less annoying than the first.

 

(page 55)

The Internet can give us information that is absolutely up-to-the-minute, but as a resource, it is democratic to a fault – everyone with a computer and an Internet hookup can express their opinion, whether they know anything or not. The avalanche of electronic information we now face is such that in order to solve the problem of choosing from among 200 brands of cereal or 5,000 mutual funds, we must first solve the problem of choosing from 10,000 web sites offering to make us informed consumers.

 

And there is good evidence that the absence of filters on the Internet can lead people astray. The RAND Corporation recently conducted an assessment of the quality of web sites providing medical information and found that "with rare exceptions, they're all doing an equally poor job. Important information was omitted, and sometimes the information presented was misleading or inaccurate. Moreover, surveys indicate that these web sites actually influence the health-related decisions of 70 percent of the people who consult them.

 

(page 57)

Kahneman and Tversky discovered and reported on people's tendency to give undue weight to some types of information in contrast to others. They called it the "availability heuristic." This needs a little explaining. A heuristic is a rule of thumb, a mental shortcut. The availability heuristic works like this: suppose someone asked you a silly question like "What's more common in English, words that begin with the letter 't' or words that have 't' as the third letter? How would you answer this question? What you probably would do is try to call to mind words that start with "t" and words that have "t" as the third letter. You would then discover that you had a much easier time generating words that start with "t." So words starting with "t" would be more "available to you than words that have "t" as the third letter. You would then reason roughly as follows: "In general, the more often we encounter something, the easier it is for us to recall it in the future. Because I had an easier time recalling words that start with 't' than recalling words with 't' as the third letter, I must have encountered them more often in the past. So there must be more words in English that start with 't' that have it as the third letter. But your conclusion would be wrong.

 

(page 58)

The availability heuristic says that we assume that the more available some piece of information is to memory, the more frequently we must have encountered it in the past. This heuristic is partly true. In general, the frequency of experience does affect its availability to memory. But frequency of experience is not the only thing that affects availability to memory. Salience or vividness matters as well. Because starting letters of words are much more salient than third letters, they are much more useful as cues for retrieving words from memory. So it's the salience of starting letters that makes t-words come easily to mind, while people mistakenly think it's the frequency of starting letters that makes them come easily to mind. In addition to affecting the ease with which we retrieve information from memory, salience or vividness will influence the weight we give any particular piece of information.

 

(page 59)

When you see film footage of a crash test in which a $50,000.00 car is driven into a wall, it's hard to believe the car company doesn't care about safety, no matter what the crash-test statistics say.

 

How we assess risk offers another example of how our judgments can be distorted by availability. In one study, researchers asked respondents to estimate the number of deaths per year that occur as a result of various diseases, car accidents, natural disasters, electrocutions, and homicides – forty different types of misfortune in all. The researchers then compared people's answers to actual death rates, with striking results. Respondents judged accidents of all types to cause as many deaths as diseases of all types, when in fact disease causes sixteen times more deaths than accidents. Death by homicide was thought to be as frequent as death from stroke, when in fact eleven times more people die of strokes than from homicides. In general, dramatic, vivid causes of death (accidents, homicide, tornado, flood, fire) were overestimated, whereas more mundane causes of death (diabetes, asthma, stroke, tuberculosis) were underestimated.

 

Where did these estimates come from? The authors of the study looked at two newspapers, published on opposite sides of the U.S., and they counted the number of stories involving various causes of death. What they found was that the frequency of newspaper coverage and the respondents' estimates of the frequency of death were almost perfectly correlated. People mistook the pervasiveness of newspapers stories about homicides, accidents, or fires –vivid, salient, and easily available to memory – as a sign of the frequency of the events these stories profiled. This distortion causes us to miscalculate dramatically the various risks we face in life, and thus contributes to some very bad choices.

 

(page 61)

Anchoring

Sensitivity to availability is not our only Achilles' heel when it comes to making informed choices. How do you determine how much to spend on a suit? One way is to compare the price of one suit to another, which means using the other items as anchors, or standards. In a store that displays suits costing over $1,500, an $800 pinstripe may seem like a good buy. But in a store in which most of the suits cost less than $500, that same $800 suit might seem link an extravagance. So which is it, a good buy or a self-indulgence? Unless you're on a strict budget, there are no absolutes. In this kind of evaluation, any particular item will always be at the mercy of the context in which it is found.

 

One high-end catalog seller of mostly kitchen equipment and gourmet foods offered an automatic bread maker for $279. Sometime later, the catalog began to offer a larger capacity, deluxe version for $429. They didn't sell too man of these expensive bread makers, but sales of the less expensive one almost doubled! With the expensive bread maker serving as an anchor, the $279 machine had become a bargain.

 

(page 63)

Frames and Accounts
And context that influences choice can also be created by language.

Imagine two gas stations at opposite corners of a busy intersection. One offers a discount for cash transactions and has a big sign that says:

Discount for paying Cash:
Cash -- $1.45 per Gallon
Credit -- $1.55 per gallon

The other, imposing a surcharge for credit, has a small sign, just above the pumps, that says:

Cash – $1.45 per Gallon
Credit – $1.55 per gallon

Beyond the difference in presentation, though, there is no difference in the price structure at these two gas stations. A discount for paying cash is, effectively, the same as a surcharge for using credit. Nonetheless, fuel-hungry consumer will have very different subjective responses to the two different propositions.

 

Daniel Kahneman and Amos Tversky call this effect framing. What determines whether a given price represents a discount or a surcharge? Consumers certainly can't tell from the price itself. In addition to the current price, potential buyers would need to know the standard or "reference price. If the reference price of gas is $1.55, then those who pay cash are getting a discount. If the reference price is $1.45, then those who use credit are paying a surcharge. What the two gas station proprietors are offering is two different assumptions about the reference price of gas.

 

The effects of framing become even more powerful when the stakes are higher:

 

Imagine that you are a physician working in an Asian village, and six hundred people have come down with a life-threatening disease. Two possible treatments exist. If you choose treatment A, you will save exactly two hundred people. If you choose treatment B, there is a one-third chance that you will save all six hundred people, and a two-thirds chance that you will save no one. Which treatment do you choose, A or B?

 

The vast majority of respondents faced with this choice choose treatment A. They prefer saving a definite number of lives for sure to the risk that they will save no one. But now consider this slightly different problem:

 

You are a physician working in an Asian village, and six hundred people have come down with a life-threatening disease. Two possible treatments exist. If you choose treatment C, exactly four hundred people will die. If you choose treatment D, there is a one-third chance that no one will die, and a two-thirds chance that everyone will die. Which treatment do you choose, C or D?

 

Now the overwhelming majority of respondents choose treatment D. They would rather risk losing everyone than settle for the death of four hundred.

 

It seems to be a fairly general principle that when making choices among alternatives that involve a certain amount of risk or uncertainty, we prefer a small, sure gain to a larger, uncertain one. Most of us, for example, will choose a sure $100 over a coin flip (a fifty-fifty chance) that determines whether we win $200 or nothing. When the possibilities involve losses, however, we will risk a large loss to avoid a smaller one. For example, we will choose a coin flip that determines whether we lose $200 or nothing over a sure loss of $100.

 

But the fact of the matter is that the dilemma facing the physician in each of the two cases above is actually the same.

 

If there are six hundred sick people, saving two hundred (choice A in the first problem) means losing four hundred (choice C in the second problem). A two-thirds chance of saving no one (choice B in the first problem) means a two-thirds chance of losing everyone (choice D in the second problem). And yet, based on one presentation, people chose risk, and based on the other, certainty. Just as in the matter of discounts and surcharges, it is the framing of the choice that affects our perceptions of it, and in turn affects what we choose.

 

Now, let's look at another pair of questions:

 

Imagine that you have decided to see a concert where admission is $20 a ticket. As you enter the concert hall, you discover that you have lost a $20 bill. Would you still pay $20 for a ticket to the concert?

 

Almost 90 percent of respondents say yes. In contrast:

 

Imagine that you have decided to see a concert and already purchased a $20 ticket. As you enter the concert hall, you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $20 for another ticket?

 

In this situation, less than 50 percent of respondents say yes.

 

Kahneman and Tversky suggest that the difference between the two cases has to do with the way in which we frame our "psychological account. Suppose that in a person's psychological ledger there is a "cost of the concert account. In the first case, the cost of the concert is $20 charged to that account. But the lost $20 bill is charged to some other account, perhaps "miscellaneous. But in the second case, the cost of the concert is $40; the cost of the lost ticket, plus the cost of the replacement ticket, both charged to the same account.

 

(page 67)
Kahneman and Tversky have used their research on framing and its effects to construct a general explanation of how we go about evaluating options and making decisions. They call it prospect theory.

If you look at the diagram above, you see objective states of affairs along the horizontal axis--positive to the right of the vertical axis, and negative to the left of it. These might be gains or losses of money, gains or losses of status on the job, gains or losses in your golf handicap, and so on. Along the vertical axis are subjective or psychological responses to these changes in states of the affairs. How good do people feel when they win $1,000 at the racetrack? How bad do people feel when their golf handicap goes up three strokes? If psychological responses to changes were perfectly faithful reflections of those changes, the curve relating the objective to the subjective would be a straight line that went right through the 0-point, or origin, of the graph. But as you can see, that is not the case. 

To figure out why prospect theory gives us this curve rather than a straight line, let's look at the two halves of the graph separately. The top, right portion of the graph depicts responses to positive events. The thing to notice about this curve is that it's steepness decreases as it moves further to the right. Thus, an objectvie gain of $200 won't give 20 units of satisfaction. It will give, say, 18 units. As the magnitude of the gain increases the amount of additional satisfaction people get out of each addtional unit decreases. The shape of this curve conforms to what economists have long talked about as the "law of diminishing marginal utility." As the rich get richer, each additional unit of wealth satisfies them less.

 

With the graph of prospect theory in view, think about this question: would you rather have $100 for sure or have me flip a coin and give you $200 if it comes up heads and nothing if it comes up tails? Most people asked this question go for the sure $100. Let's see why. A sure $100 and a fifty-fifty chance for $200 are in some sense equivalent. The fact that the payoff for the risky choice is double the payoff for the sure thing exactly compensates for the fact that the chances you'll get the payoff are halved. But if you look at the graph, you'll see that psychologically, you won't feel twice as good with $200 in your pocket as you will with $100 in your pocket. You'll feel about 1.7 times as good. So to make the gamble psychologically worthwhile to you, I'd have to offer you something like $240 for a heads. Thus, Kahneman and Tversky point out, people tend to avoid taking risks--they are "risk averse"--when they are deciding among potential gains, potential positive outcomes.

 

Now let's look at the other side of the graph, which depicts response to losses. It too is a curve, not a straight line. So suppose I asked you this question: would you rather lose $100 for sure or have me flip a coin so that you lose $200 if it comes up heads and you lose nothing if it comes up tails? As in the last example, double the amount is compensated for by half the chances. If you don't like risks in the first problem, you probably won't like them in the second either. This suggest you'll take the sure loss of $100. But chances are you didn't, and the graph tells us why. Notice that the curve falls steeply at the beginning and then gradually levels off. This reflects what might be called the "decreasing marginal disutility of losses." Losing the first $100 hurts worse than losing the second $100. So although losing $200 may be twice as bad objectively as losing $100. It is not twice as bad subjectively. What that means is that taking the risk to perhaps avoid losing anything is a pretty good deal. Thus, as Kahneman and Tversky again point out, people embrace risk--they are "risk seeking"--in the domain of potential losses.

 

There is another feature of the graph worth noting: the loss portion of the graph is much steeper than the gain portion. Losing $100 produces a feeling of negativity that is more intense than the feeling of elation produced by a gain. Some studies have estimated that losses have more than twice the psychological impact as equivalent gains. The fact is, we all hate to lose, which Kahneman and Tversky refer to as loss aversion.

 

The last and crucial element to the graph is the location of the neutral point. This is the dividing line between what counts as a gain and what counts as a loss, and here, too, subjectivity rules. When there is a difference in price between cash and credit at the gas station, is it a discount for cash or a surcharge for credit? If you think it's a discount for cash, then you're setting your neutral point at the credit card price and paying cash is a gain. If you think it's a surcharge, then you're setting your neutral point at the cash price, and using your credit card is a loss. So fairly subtle manipulations of wording can affect what the neutral point is and whether we are thinking in terms of gains or losses. And these manipulations will in turn have profound effects on the decisions we make--effects that we really don't want them to have, since in an important sense, discounts and surcharges are just two ways of saying the same thing.

 

In the same way, we give disproportionate weight to whether yogurt is said to be 5 percent fat or 95 percent fat free. People seem to think that yogurt that is 95 percent fat free is a more healthful product than yogurt that has 5 percent fat, not realizing, apparently, that yogurt with 5 percent fat is 95 percent fat free.

 

Or suppose you are one of a large group of participants in a study and for your time and trouble, you are given either a coffee mug or a nice pen. The two gifts are of roughly equal value and randomly distributed--half of the people in the room get one, while the other half get the other. You and your fellow participants are then given the opportunity to trade. Considering the random distribution, you would think that about half the people in the group would have gotten the object they preferred and that the other half would be happy to swap. But in fact, there are very few trades. This phenomenon is called the endowment effect. Once something is given to you, it's yours. Once it becomes part of your endowment, even after a very few minutes, giving it up will entail a loss. And, as prospect theory tells us, because losses are more bad than gains are good, the mug or pen with which you have been "endowed" is worth more to you than it is to a potential trading partner. And "losing" (giving up) the pen will hurt worse than "gaining" (trading for) the mug will give pleasure. Thus, you won't make the trade.

 

The endowment effect helps explain why companies can afford to offer money-back guarantees on their products. Once people own them, the products are worth more to their owners than the mere cash value, because giving up the products would entail a loss. Most interestingly, people seem to be utterly unaware that the endowment effect is opertaing, even as it distorts their judgment. In one study, participants were given a mug to examine and asked to write down the price they would demand for selling it if they owned it. A few minutes later, they were actually given the mug along with the opportunity to sell it. When they owned the mug, they demanded 30 percent more to sell it than they had said they would only a few minutes earlier!

 

One study compared the way in which the endowment effect influences people to make car-buying decisions under two conditions. In one condition, they were offered the car loaded with options, and their task was to eliminate the options they didn't want. In the second condition, they were offered the car devoid of options, and their task was to add the ones they wanted. People in the first condition ended up with many more options than people in the second. This is because when options are already attached to the car being considered, they become part of the endowment and passing them up entials a feeling of loss. When the options are not already attached, they are not part of the endowment and choosing them is perceived as a gain. But because losses hurt more than gains satisfy, people judging, say, a $400 stereo upgrade that is part of the car's endowment may decide that giving it up (a loss) will hurt worse than its $400 price. In contrast, when the upgrade is not part of the car's endowment, they may decide that choosing it (a gain) won't produce $400 worth of good feeling. So the endowment effect is operating even before people actually close the deal on their new car.

 

Aversion to losses also leads people to be sensitive to what are called "sunk costs." Imagine having a $50 ticket to a basketball game being played an hour's drive away. Just before the game there's a big snowstorm--do you still want to go? Economists would tell us that the way to assess a situation like this is to think about the future no the past. The $50 is already spent; it's "sunk" and can't be recovered. What matters is whether you'll feel better safe and warm at home, watching the game on TV, or sloggin through the snow on treacherous roads to see the game in person. That's all that should matter. But it isn't all that matters. To stay at home is to incur a loss of $50 and people hat losses, so they drag themselves out to the game.

 

Economist Richard Thaler provides another example of sunk costs that I suspect many people can identify with. You buy a pair of shoes that turn out to be really uncomfortable. What will you do about them? Thaler suggests:

The more expensive they were, the more often you'll try to wear them.

Eventually, you'll stop wearing them, but you won't get rid of them. And the more you paid for them, the longer they'll sit in the back of your closet.

At some point, after the shoes have been fully "depreciated" psychologically, you will finally throw them away.

 

It there anyone who does not have some item of clothing sitting unused (and never to be used) in a drawer or on a shelf?