Nova workboard

a blog from young economists at Nova SBE

The Paradox of choice

According to Barry Schwartz, a scholar in economics and psychology, in modern society it’s embedded the idea that, the way to maximize our welfare is by increasing the individual freedom, so people can act on their own. And to maximize individual freedom we should maximize choice.

For Schwartz, maximization of choice can lead to some other results, and have some negative impact on people’s behavior and satisfaction, in something that he calls the Paradox of Choice.

First, the abundance of choice may cause paralysis on the consumer, rather than individual freedom, in a way that people tend to avoid or defer decisions. This is mainly because, with plenty of options available, decisions become too difficult to take. And even when they decide, people simplify their process of choice to a level that they are not able to make the optimal choice. This also has implications to firms, because eventually sales can drop.

Another downside lies on the fact that, the opportunity costs become bigger. Too many choices may deduct satisfaction from what we choose, because it’s easy to picture other scenarios where we could have made a better choice, no matter how good our decision is.

So according to this theory, consumer will end up worse off, with more choice, leading to a shift of consumers indifference curves to the left.

But is this what really happens? There have been several inconclusive attempts to replicate and prove the studies that showed that, with more choice, consumer satisfaction and sales could go down.

Actually, there are several assumptions that must be questioned. The first one is that firm sales can drop with more choice. This doesn’t seem entirely true since it is the market that sets equilibrium. If there is too much choice and sales drop, some firms get out of the market reducing the choice available. Moreover, firms set their range of products and their production in order to maximize profits.

More choice should also lead to more sales because it’s more likely that a consumer will find a choice that can fulfill his requirements and that best suits him. Just take as an example the automobile sector where there is a wide range of options. The sales are very likely to increase since the consumer can choose that car with all the specs that he finds perfect.

Other important fact to mention is that the studies that support this theory are fragile, and the results may be explained by some random variations.

So, the paradox of choice doesn’t exist at all? It may exist, but only in specific cases, when decision is not about trifling things and the consumer has not enough knowledge to make a decision by his own. One example of this is the number of investment products where you can apply your money. There is so many options that, rather than being good, consumer will feel paralyzed and will postpone his decision for a long time. In those cases people prefer to have less choice or to shift responsibility to other entity or person, because in this cases taking responsibility, is just what could decrease satisfaction. When having less choice, the blame for not making the best decisions it’s not ours. It’s from the markets for not offering you the product that best suits you. With plenty of choice, we will always regret for haven’t taken other choice rather than ours. And that regret is what subtract us satisfaction.

But in most cases, the increase of choices available it’s very unlikely to harm the consumer utility at all.

Nuno Antunes 649

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Author: studentnovasbe

Master student in Nova Sbe

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