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Using Game Theory to Optimize the Pace of New Technology Adoption
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A Very Brief History of the Evolution of Choice

The recently awarded prize by Netflix for coming up with a more accurate prediction algorithm has been on my mind lately. To be more precise, what I’ve been thinking about is what the winners have achieved with their algorithm. That is, why is being able to predict what people will like so important, or in more “useful” terms, what is the value of being able to predict what people will like?

Along those lines, I’ve been thinking about how market offerings have evolved to provide people with choices, and then later to help them select among their choices.

The situation is this: a person must satisfy a need or want: select a book to read, a movie to watch, a car to buy, or a doctor to see.

The first question that comes to mind is “what are my options.” Either in anticipation of and/or in response to this question, suppliers have sought to help consumers first define, then provide access to, their universe of options. The epitome of the market response to “what are my options?” is the Yellow Pages. Abstracting a bit, the Yellow Pages provides as complete a listing as possible of all the options available to a consumer seeking to meet a particular need. And as the costs of communication and transportation have decreased, this list of options available to consumers has grown exponentially, from options available locally, to regionally, to nationally, to globally.

The second, more evolved question is “given my options, which should I choose?” Again, either in anticipation of and/or in response to this question, suppliers have sought to help consumers choose among their various options, through branding/reputation; the provision of large, prominent, or frequent ads; or the provision of product or price information.

A refinement of “here’s what I have to offer” response to the question of “which option should I choose?” is the “here’s what other people chose” response. Best-seller lists and lists of awards won by various products and manufacturers are the classic reply for “here’s what other people chose.” Of course, the implication here is that the items that people chose most often must be the best.

After that, increasingly available types and amounts of information enabled suppliers to improve upon the “here’s what other people chose” response by also providing “and here’s what they thought about it.” We now discovered that just because people chose something, doesn’t mean they liked it. Knowing which items people not only chose, but whether or not they actually liked them, proves to be enormously useful in helping people make the right choices.

Amazon further helped evolve the problem of choice my making recommendations to consumers based on items they had purchased or were thinking about purchasing ("people who bought this also bought that.")

And then just when you thought it couldn’t get any better, Netflix came out with a way of telling consumers “given your stated/historical preferences, here’s what you will probably think about this item.”

 

More vs. Better Options

After working my way through this evolution of providing consumers with choices, then helping them decide which option would most likely be best for them, I had a revelation. There’s a huge different between having more choices and having better choices.

This revelation reminded me of a body of work regarding how having too many choices can be a bad thing. I found an article in the LA Times on this topic, “Too Many Choices Can Tax the Brain, Research Shows” by Tammy Worth. Briefly, this article states

Americans have come to expect a wide array of choices … But more choices do not always equate to happier consumers. In fact, some studies show that having to make too many decisions can leave people tired, mentally drained and more dissatisfied with their purchases. It also leads people to make poorer choices -- sometimes at a time when the choice really matters … even making pleasant choices can deplete one's mental resources, making a person less able to concentrate later…

Making decisions takes work, says Barry Schwartz, a professor of psychology at Swarthmore College and author of the 2004 book, "The Paradox of Choice: Why More Is Less." "The mere act of thinking about whether you prefer A or B tires you out," Schwartz says. "… one of three things is likely to occur when people have too many decisions to make -- consumers end up making poor decisions, are more dissatisfied with their choices or become paralyzed and don't choose at all…

Even when we choose well, we are often less satisfied because, with so many choices, consumers are certain that somewhere out there was something better...

The final problem with decision-making is that it can overwhelm people to the point of their making a default choice or no choice at all.

There’s also a video available of a wonderful talk on the subject given by Barry Schwartz.

Let’s revisit the situation: a person must satisfy a need or want: select a book to read, a movie to watch, a car to buy, or a doctor to see.

From the perspective of suppliers, there’s a tension here. By providing more options, suppliers will have a better opportunity to better satisfy the needs of a wider variety of consumers, and at the same time, suppliers will have a better opportunity to better satisfy the needs of each consumer. So, there’s more potential value when there are more choices.

On the other hand, when there is little information available to consumers, by providing more choices, suppliers have a higher chance of leaving consumers with a wrong choice for them. In this case, there’s less potential value when there are more choices.

[Take a very crude example. Suppose consumer “needs” for a particular item are evenly distributed from 1 to 5. That is, 20% of consumers need a 1, 20% need a 2, 20% a 3, 20% of 4, and 20% a 5. If suppliers provide only one option, they will do best by supplying only 3s. In this case, no consumer is more than 2 units away from his preferred choice. Now suppose suppliers increase their offerings to two choices. With two offerings, suppliers will do best by providing both 2s and 4s. However, with no information available, consumers have an equal chance of selecting 2 or 4. If a consumer with need 1 chooses a 4, then he is 3 units away from his best choice. When there was only one option available, a 3, the consumer was only 2 units away from his best choice. As such, then, the consumer is worse off with two choices than he is with one.]

Ideally, suppliers want to provide a large range of choices to increase the potential value to each consumer, as well as to increase the potential market size (the number of people to whom the product appeals). Yet, suppliers also want to provide as much information as possible to help each consumer make the right choice for him. In this way, suppliers will maximize the total potential reach of their product as well as the potential value of the product to each consumer. And this is precisely how the market has evolved. As communication and transportation costs have decreased, the range of choices available to consumers has increased. And, perhaps with a bit of a lag, the increasing availability of information has enabled suppliers to help consumers wade through the increasing number of choices to make better decisions for themselves.

This leads to an interesting conclusion. When a person wants to satisfy a need, what he actually wants to know is which is the best choice for him (at that particular time). The paradox of choice says that he doesn’t want to know what his thousands of different options are. Rather, what he wants to know is which is the option that will best satisfy his needs. Given the way the market is evolving, even though his potential options might end up being in the thousands, a specific consumer might eventually be offered only a select few choices that are deemed closest to his ideal pick. At that point, will he feel more satisfied because he only has to choose between a few items, or will he feel less satisfied because he was only given a few options to choose from? 

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