Andrew Leigh

My op-ed in today's Sydney Morning Herald discusses new research about how to make better decisions.

Spoilt by choice: how data ruins decisions, Sydney Morning Herald, 13 April 2012

In a share-trading experiment, two groups of university students were pitted against one another. One team saw only share prices, while the other team could also consult experts and media reports. The result? The better-informed team ended up reacting to rumours and gossip, made too many trades, and earned half as much as their less-informed classmates.

In his book How We Decide, Jonah Lehrer discusses a host of situations in which too much information leads us to make worse decisions. Guidance counsellors who can only see test scores do a better job of predicting whether students will perform well at university than when they can also draw upon essays and a personal interview. In the case of back pain, doctors who obtain an MRI scan are more likely to misdiagnose the patient as having disc abnormalities, and more likely to erroneously prescribe intensive medical interventions. Doctors are now advised not to get scans done on patients with non-specific lower back pain.

In the standard economic model, more information is never a bad thing. Yet studies like these are forcing economists to now incorporate ‘cognitive costs’ in our models. Similarly, another set of experiments suggest that having more choices can make us worse off.

Psychologist Sheena Iyengar made her reputation with an experiment which found that a tasting booth showing 24 jam flavours drew more customer attention, but one with 6 varieties sold more jam.

In her book The Art of Choosing, Iyengar gives examples of shampoo and cat litter companies who increased sales by reducing their product range. With fewer choices, employees are more likely to sign up for matched savings plans. Iyengar even finds that 3 year-olds who are allowed to choose from among a hundred different toys are less happy than children who are told to play with a single toy.

One of the surprising findings in the literature on choice is that we tend to get more enjoyment out of expensive products. After buying an expensive caffeine drink, students did better on a test than if they had purchased the same drink at a lower price. When subjects were asked to drink samples of cabernet sauvignon in a brain scanner (which must rank as one of the most agreeable neuroscience experiments of all time), researchers found more activity in the prefrontal cortex when the bottle was labelled $45 than when it was labelled $5.

We also have a strong tendency to discount the future. In an auction of sports tickets, the sale price was twice as high when bidders could use a credit card than when they had to pay cash. Conversely, when employees are given the option of putting their next pay raise into savings (a program called ‘Save More Tomorrow’), many jump at the chance to bind their future selves.

So how can we use this research to make better choices? Lehrer maintains that for simple choices (e.g. which vegetable peeler to buy), we should be guided by our rational brain. Go for functionality and price, and damn the colour scheme. Conversely, he makes the case that for complex items (e.g. which car to buy), there are too many dimensions to the problem for our rational brain to cope with. In such instances, we shouldn’t be afraid to let our emotions choose.

As a person who has been completely blind since childhood, Iyengar has to rely on others for many of her aesthetic choices. She argues that we should do the same, recognising the limits to our uniqueness. Asked ‘How similar are you to others’, most of us say ‘not very’. Yet when the question is posed as ‘How similar are others to you?’, most of us say ‘very’.

Iyengar contends that we will make better decisions if we draw on the experiences of others. We might ask: do people who make this choice look to be happier and more satisfied? Whether it’s studying restaurant customer ratings, reading book reviews on Amazon.com, or asking the advice of workmates, the collective savvy of other consumers can help us make better choices.

So there you have it. Beware of excess information. Narrow down the number of choices. Don’t look at the price tag before judging quality. Pay cash if you’re worried about overspending. Use your rational brain for small choices and your emotional side for big decisions. And remember to get by with a little help from your friends.

Andrew Leigh is the federal member for Fraser.