Choice architecture November 17, 2010

Overview What is choice architecture? What can it do? What are some good examples? What are important features of choice architecture? The paradox of choice

Choice architecture How you organize the context in which people make decisions Some of the best ways to be a choice architect: – Provide some context – Organize the options – Give a starting point

Choice architecture Provide some context Organize the options Give a starting point

Provide a comparison

Provide a compromise

Which “costs” more?

Choice architecture Provide some context Organize the options Give a starting point

Which would you rather buy? Popcorn #1Popcorn #2 Large-size kernelsMedium-size kernels Only pennies per serving! As many calories as a slice of breadAs many calories as a tablespoon of sugar Light corn and grain flavorEasy to swallow Not too salty Easy to prepare Tastes just a little bit sweetDifficult to burn Includes waterproof wrappingVery tender Pops in its own bagRequires separate microwaveable bowl Stays crunchy for at least 24 hoursStays crunchy for at least 3 hours Zhang & Markman, 2001

Which platform to use?

Medicare Part D

Choice architecture Provide some context Organize the options Give a starting point

Change the order Downs et al., 2009

Change the order The candidate listed first on the ballot receives on average a 2 percentage point advantage— enough to flip a close contest Why? – People are often drawn to the first thing they see or try—it just sticks in their head – Voters may not have a preference stepping into the booth—pick the first name they see Some states go alphabetical by name or party; others rotate by precinct Worst: when officials are allowed to pick, they often put candidates from their own party first

Change the default Madrian & Shea, 2001

The power of defaults Opt in Opt out Johnson & Goldstein, 2003

The power of defaults At the time of the study, the standard auto insurance policy in New Jersey did not entail the right to sue for pain and suffering from minor injuries, although that right could be obtained by purchasing a higher priced policy – 20% opt for the higher-priced policy In Pennsylvania, the standard auto insurance policy entailed a full right to sue, although a cheaper, “limited rights” option was available – 75% retain their full rights (i.e., opt for the higher- priced policy) Johnson et al., 1993

The power of defaults Customers in California currently enjoying perfectly reliable electric service were offered somewhat less reliable service for discount on their monthly bill – Almost no one said yes Customers with somewhat unreliable electric service were offered more reliable service for a monthly surcharge (equal to the discount above) – Almost no one said yes

Why do defaults work? Status quo bias—people stick with the way things are, and don’t like to change – Some of it is information—if it’s the way things are, it must be okay – Some of it is loss aversion—it’s harder to give up something than gain the other option – Some of it is endowment—if it’s mine now, it’s special and I don’t want to give it up Laziness, anxiety, and other barriers to action

Why is choice architecture effective? Structure – Guide for decisions Flexibility – People still get to choose, it’s just easier Simplicity – Easy to enact, little effort required on part of decision makers

The paradox of choice Our options are ever increasing – In products: 19 different kinds of Hershey’s Kisses have been on the market; 24 kinds of Oreos – In careers: College education allows people to consider careers inaccessible 30 years ago – In love: Relationships that aren’t given a second thought today would have been unthinkable to our grandparents

Is choice a good thing? When asked, people believe that more options is better – Free society implies the freedom to choose – Everything in life is a choice Some choices are ingrained and so no longer seem to be a choice Some seem to be unimportant or irrelevant – These choices are implicit and psychologically unreal

Is choice a good thing? Implicit choices make our lives easier—can you imagine explicitly making every choice we encounter during the day? The increase in number of choices is turning some formerly implicit choices into explicit and burdensome ones Each individual choice is not bad—it is the cumulative effect that leads to problems Some argue we are trapped in “the tyranny of small decisions”

Is choice a good thing? Even big choices are often threatening or burdensome – 65% of people say they would like to choose the course of cancer treatment before they are diagnosed, but only 12% wish to choose after diagnosis – As the number of mutual funds in a 401(k) plan goes up, the rate of participation goes down, even when employers match funds 10 more mutual funds = 2% less participation

Number of options

Alternatives – While it seems like choosing from a larger array of choices should lead to better decisions, it appears that choosing from smaller arrays actually leaves people happier with their choice – For example, a study done at Stanford showed that people who taste 6 different jams are happier with their favorite flavor of jam and are more likely to buy that type of jam or any jam than those who taste 24 different jams – People are happier and actually write better papers when they are given a small number of topics to choose from than a large number – People are happier with a chocolate when they choose it from an array of 6 chocolates than when they choose from an array of 30

Number of options It appears that a larger number of alternatives leads to more regret with the final choice The quality of the top two or three options can be much closer than in a smaller array – “Out of 24 jams, there must have been one at least equally as good as the one I chose.” The options you did not choose are much more salient yet less distinguishable when the array is larger The pressure to make a good choice is also greater with a large choice set

Summary Careful design of options can make choosers happier with their decisions – Give them some context – Organize their options – Give them some place to start Watch out: too many choices can be a bad thing