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TED@AllianzGI Video | November 2011

John Payne: Overcoming Information Overload in Decision Making

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At the TED@AllianzGI conference at the Time Warner Center, New York in November 2011 Professor John Payne of Duke University explores the ramifications of information overload – the ways in which too much information can paralyze decision-making. He introduces three strategies for overcoming information overload, and help the audience to understand the ways in which they can approach the sheer volume of information in their lives in a different way.

Professor John Payne is a member of the Allianz Global Investors Center for Behavioral Finance Academic Advisory Board.

Professor John Payne: Overcoming Information Overload in Decision Making

Introduction:

TED – Ideas Worth Spreading

Professor John Payne:

 May I use an opening line from one of the great books of all time – by Charles Dickens – and ask for show of hands? How many people think today decision makers are living in the best of all worlds in terms of their abilities as decision makers? How many think this is the best of all times in terms of decision making? Well I see a few in the back. All right, I assume that the rest of you would argue that this is the worst of times. [Laughing] OK. What I want to do is talk about that issue and in particular relating it to the issue of information.

Now, I would argue that in many ways this is the best of times. If you think about finance and retirement, we now have the freedom to make choices that we never had in the past. We have far more options to choose among. At Duke University in retirement I have a choice of over 300 investment funds to put my money into. Information; we have a wealth of information, and it is only growing. Now, I understand that a number of people in this room are currently in the midst of their open enrollment plan selection at their organization. Well, in preparing for this talk, I have been part of that open enrolment at Duke University. So let me tell you a little bit about the healthcare open enrolment plan there. We have four really nice plans as you would expect at a University that has one of the best medical schools, hospitals in the world. So we have four plans and these plans for family vary from a few hundred dollars to double that - per month. To help us be informed consumers, they give us information. And I was struck in the information I got. I got a booklet that had a chart that allowed me to compare these four plans on 33 distinct dimensions. Things like how much it would cost to take an ambulance to a hospital. You think about that - that is four plans, 33 pieces of information; that’s over 120 pieces of information. Some of that information was in the form of dollar amounts, co-payments; some of that information was in terms of percentage discounts for ambulance services, and yet other information was in terms of particular medical treatments that were covered and those that were not covered, and quite honestly I didn’t recognize half the plan treatments that they were talking about. Now, one might argue that with all that choice freedom, with all the various information, distinct dimensions, this the best in time and should lead to an age of wisdom in decision making. Ah… If it was only so…

For too many people I suspect all that information that you are processing right now in your open enrolment - and by the way it’s just not with retirement and health, think about the choices you have for cellphones, cellphone plans and the information that you can get about those. Now you might say, wait a minute John, what’s going on here? Well I would argue that the wealth of information that we have, can sometimes not lead to an age of wisdom, but to age of foolishness. And the reason is simple. One takeaway from today: In today’s world I will argue, the scarce resource for decision making is not information, the scarce resource is attention. And, in order to really help people to make better decisions – this is the second takeaway – fundamental to that is helping people better manage their scarce attentional resources.

Now, what are some of the consequences of potential information overload? One is decision avoidance: so much information you decide, I’m not going to decide! Alright. Funny often when you talk to people about that they’ll say: “Well I want to collect more information” but it’s really a form of decision avoidance. Another sort of variation of decision avoidance is you go with the status quo option or a default option. And in fact to be honest that’s what I did. They are processing all that information, finally got to the point I’m going to do what I did last year, and what I did the year before, and stay with the same basic health plan. Now, an interesting implication of that – and we’ve talked about this – is I will argue as the world becomes more and more crowded if you will with information, choice architecture will matter even more in terms of smart defaults that people will use.
 
What’s another consequence of information overload? It is that you will essentially go to simple heuristics for making choices. Now, these heuristics often involve using less information and using information in perhaps less complex ways. So instead of trying to think hard about a management fee for fund and how good or how bad it is, you essentially make a much simpler judgment of is it acceptable or not. Now, I worked in the area of information overload and choice heuristics for much of my career. And it’s an interesting result here, which is these choice heuristics actually aren’t bad, they can often lead to very, very good decisions. The secret here though is that you focus your attention on the most important information and don’t get distracted by the irrelevant information. Now, that wouldn’t be a problem, except the attention is both driven from top down - what our values are, so our values will drive what we pay attention to. But the environment we’re in - what’s salient, what’s easy to process - will also drive our attention. And in doing that our attention will drive our choices, our preferences.
 
So what I want to do in the time remaining is talk about two ways of just trying to sort of help people manage their scarce attentional resources in a world characterized by lots of information. And the first one I want to talk about is for the people who are in the business of providing information for decision makers. I want to distinguish between something we are all very familiar with which is the role one might be calling or is called psychology or cognitive fluency. That is that the information is easy to read, in a nice location on the screen, etc. And I am going to argue for a different kind of fluency and that is emotional fluency. And the idea here is that if you present information, preference related information, to a decision maker, and he or she cannot look at the information and quickly come to a judgment whether it is good information in the sense that it causes you to sort of want to approach that option; or it is bad information that causes you to sort of want to move away from the option. If you do not have cognitive ease, that information will tend to be ignored. So you need to think about in the information provision, what are do you doing to make it easier, affectively easier, for people to judge that information as good or bad. The other thing I will argue is in a world of increasing information, what you need to do is actually spend more time, not less, before you deal with that information. Trying to get clarity on your values; to do what a colleague of mine calls more value focused thinking. What really are your objectives for making those decisions. And I will give you a simple sort of three card solution for doing that. Fine.

This is a diagram and I’ll try to get through this fairly quickly. This will be appearing in showrooms around the nation fairly soon, it’s the new EPA gas mileage and it really illustrates some nice things about affective ease and also choice overload. Compare this diagram, what the current one is, and you will see there is a lot more information and actually there is now at the bottom here the opportunity to collect even more information by using your smart cellphone and going to some website.

One thing I do want to point out here is that it now includes information about mileage. We have that mileage in a couple of different forms and it also includes information about pollution. Two things I want to point out here is affective ease - this is good principles here. If you noticed up on the right instead of giving you just what the total price you might pay for fuel over five years is, it gives you a relative number. So you can either see it as you will save more, or, you will spend more. One of the things that we know about human judgment is that it tends to be much more relative than absolute - you increase affective ease by conveying relative judgments much more than absolute numbers. The other thing to notice in here is that in pollution they will give you information in small print here that this car happens to produce 347g of CO2 gas per mile. Now I don’t know about you but I have no idea what I just said in terms of the meaning of that, but EPA does a really nice job of sort of giving you a relative scale for that.

Anchored by the worst and best values. So now you can see that this car in terms of greenhouse gas is at least a little above average in terms of that.

What do you do in a situation where you don’t have a nice provider of information, who helps you with the affective ease? What I propose here is that you spend more time worrying about your values as the amount of information increases. And let me give you a simple little trick for dealing with your objectives in the context of a lot of information. Imagine you have three cards: one gold, one silver, one bronze. Simply spend some time trying to identify on the first card what your most important objective might be. So in retirement management of my resources, it might be a comfortable monthly income for my wife and I. What would be second? Well, I have two sons, at least early on, I want to make sure that if something bad does happen to my wife and I, there is some inheritance to get them started. Third objective I have quite honestly is, I’ve spend a lot of my life worrying about building up wealth. I don’t want to be spending a lot of my time while I’m in retirement worrying about that wealth.

So, I think three cards is a reasonable number simply because I think one of the things you want to do is not get in the trap of sort of going for one single objective - three gives you the ideas of a reasonable trade off. Now, is three a hard bet for all? NO! In my experience and my recommendation is three is probably a good starting point for any decision; nine is probably pushing the limits of attention.

OK. Let me wrap up. I think today we face a world of increasing information which is great, but it does cause a problem of information overload because the scarce resources for good decision making today is attention, not information. And what we need to do is try to make this the best of time for decision makers by doing a great job of helping them to manage that scarce resource in the world of more and more and more information.

Thank you very much.

[Applause]
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