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TED@AllianzGI Video | November 2011

Sheena Iyengar: Be choosy about choosing

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At the TED@AllianzGI conference at the Time Warner Center, New York Professor Sheena Iyengar of the Columbia Business School discusses how people choose when confronted with a vast choice. She talks about strategies for dealing with what can sometimes be overwhelming choices in our lives, focusing on ‘the four C’s’. Iyengar explores ways in which strategies can help us to make better decisions in our everyday lives.

Professor Sheena Iyengar: Be choosy about choosing

Introduction:

TED – Ideas Worth Spreading

Professor Sheena Iyengar:

Good afternoon everybody.

Do you know how many choices you make in a typical day? Do you know how many choices you make in a typical week? I recently did a survey with over 2,000 Americans, and the average number of choices that the typical American reports making is about 70 in a typical day. There was also recently a study done with CEOs, in which they followed CEOs around for a whole week, and these scientists simply documented all the various tasks that these CEOs engaged in and how much time they spent engaging in making decisions related to these tasks. And they found that the average CEO engaged in about 139 tasks in a week, each task was made up of many, many, many sub-choices of course. 50% of their decisions were made in 9 minutes or less. Only about 12% of the decisions did they make in an hour or more of their time. Think about your own choices. Do you know how many choices are making it into your 9 minute category versus your one hour category? How well do you think you’re doing in managing those choices?

Today, I want to talk about one of the biggest modern day choosing problems that we have, which is the choice overload problem. I want to talk about the problem and some potential solutions. Now as I talk about this problem, I’m going to have some questions for you and I’m going to want to know your answers. So, when I ask you a question, since I’m blind, only raise your hand if you want to burn off some calories. Otherwise, when I ask you a question and if you answer is yes, I’d like you to clap your hands. So, for my first question for you today, are you guys ready to hear about the choice overload problem?

[Applause]

Thank you.

So when I was a graduate student at Stanford University, I used to go to this very, very upscale grocery store. At least at that time it was truly upscale. There is a store called Draeger’s. Now this store, it was almost like going to an amusement park. They had 250 different kinds of mustards and vinegars and over 500 different kinds of fruits and vegetables and more than 2,000 different kinds of bottled water. And this was during a time when we actually used to drink tap water. I used to love going to the store, but in one occasion I asked myself, how can we ever buy anything? Here is their olive oil aisle. They had over 75 different kinds of olive oils including those that were in a locked case that came from a thousand year old olive trees. So I one day decided to pay a visit to the manager and I asked the manager “you know is this model of offering people all this choice really working?” And he pointed to the busloads of tourists that would show up every day, with cameras ready usually.

Well, we decided to do a little experiment. And we picked jam for our experiment. Here is the jam aisle. They had 348 different kinds of jam. We set up a little tasting booth right near the entrance of the store. We there put out 6 different flavors of jam, or 24 different flavors of jam. And we looked at two things. First, in which case were people more likely to stop and sample some jam. More people stopped when there were 24, about 60%, than when there were 6, about 40%. The next thing we looked at is in which case were people more likely to buy a jar of jam. Now we see the opposite effect. Of the people who stopped when there were 24, only 3% of them actually bought a jar of jam. Of the people who stopped when there were 6, now we saw that 30% of them actually bought a jar of jam. Now if you do the math, people were at least 6 times more likely to buy a jar of jam if they encountered 6 than if they encountered 24.


Now, choosing not to buy a jar of jam is actually probably good for us, at least it’s good for our waistlines, but it turns out that this choice overload problem affects us even in very consequential decisions. We chose not to choose even when it goes against our best self-interests.

So now, for the topic of today: financial savings. This is a study that I did with Gur Huberman, where we looked at the retirement savings decisions of nearly a million Americans from about 650 plans, all in the US. And what we looked at was whether the number of fund offerings available in a retirement savings plan, the 401 (k) plan, does that affect people’s likelihood to save more for tomorrow? And what we found was that, indeed, there was a correlation. So, in these plans, with about 657 plans that ranged from offering people anywhere from 2 to 59 different fund offerings. And what we found was that, the more funds offered, indeed, there was less participation rate. So if you look at the extremes, those plans that offered you two funds with participation rates for around the mid seventies – still not as high as we want it to be. In those plans that offered nearly 60 funds, participation rates have now dropped to about 60 percentile.

Now it turns out that even if you do choose to participate when there are more choices present, even then, it has negative consequences. So for those people who did choose to participate, the more choices available, the more likely people were to completely avoid stocks or equity funds. The more choices available, the more likely they were to put all their money in pure money market accounts. Neither of these extreme decisions are the kinds of decisions that any of us would recommend for people when they are considering their future financial wellbeing. Well, over the past decade, we have observed three main negative consequences to offering people more and more choices. They’re more likely to delay choosing, procrastinate, even when it goes against their best self-interest. They’re likely to make worse choices, worse financial choices, medical choices. They’re more likely to choose things that make them less satisfied, even when they do objectively better. The main reason for this is because, well, we might enjoy gazing at those giant walls of mayonnaises, mustards, vinegars, jams, but we can’t actually do the math of comparing and contrasting and actually picking from that stunning display.

So what I want to propose to you today are four simple techniques, techniques that we have tested in one way or another in different research venues, that you can easily apply in your businesses.

The first: Cut. You’ve heard it said before, but it’s never been more true than today that less is more. People are always upset when I say cut. They are always worried they’re going to lose shelf space. But in fact, what we’re seeing more and more is that if you are willing to cut, get rid of those extraneous redundant options, well, there is an increase in sales. There is a lowering of costs, there is an improvement of the choosing experience. When Procter & Gamble went from 26 different kinds of Head & Shoulders to 15, they saw an increase in sales by 10%. When the Golden Cat Corporation got rid of their 10 worst selling cat litter products, they saw an increase in profits by 87%. A function of both increase in sales and lowering of costs. You know, the average grocery store today offers you 45,000 products. The typical WalMart today offers you 100,000 products. But the 9th largest retailer, the 9th biggest retailer in the world today is Aldi and it offers you only 1,400 products. One kind of canned tomato sauce.

Well, in the financial savings world I think one of the best examples that has recently come out on how to best manage the choice offerings is actually something that David Laibson was heavily involved in designing, which is a program that they have in Harvard. Every single Harvard employee is now automatically enrolled in a lifecycle fund. For those people who actually want to choose, they’re given 20 funds, not 300 or more funds. You know, often, people say “I don’t know how to cut, they’re all important choices” and the first thing I do is ask the employees “tell me how these choices are different from one another” and if your employees can tell them apart, neither can your consumers.

Now, before we started our session this afternoon, I had a chat with Gary, and Gary said that he would be willing to offer people in this audience an all expenses paid free vacation to the most beautiful road in the world. Here is a description of the road and I’d like you to read it and I want you to clap your hands if you’re ready to take up Gary on his offer.

Anybody ready to take up on his offer?

[Applause]

Is that all? Let me show you some more about this. You guys knew there was a trick, didn’t you? Now, who is ready to go on this trip?

[Laughs]

[Applause]

I think I might have actually heard more hands. Now, in fact you had objectively more information the first time around than the second time around. But I would venture to guess that you felt that it was more real the second time around - because the pictures made it feel more real to you.

Which brings me to the second technique for handling the choice overload problem, which is concretization. In order for people to understand the differences between the choices they have to be able to understand the consequences associated with each choice. And that the consequences need to be felt in a vivid sort of way, in a very concrete way. Why do people spend an average of 15 to 30% more when they use an ATM card or credit card as opposed to cash? Because it doesn’t feel like real money. And it turns out that making it feel more concrete can actually be a very positive tool to use in getting people to save more. So a study that I did with Shlomo Benartzi and Alessandro Previtero, we looked at people at ING, employees that are all working at ING. And now these people were all in a session doing enrolment for their 401 (k) plan. And during that session – we kept the session exactly the way that it used to be – but we added one little thing. The one little thing we added was to ask people to just think about all the positive things that would happen in your life if you saved more. By doing that simple thing, there was an increase in enrollment by 20% and there was an increase in the amount of people that were willing to save and the amount that they were willing to put down into their savings account by 4 %.

The third technique: Categorization. You know, we can handle more categories than we can handle choices. So, for example, here is a study that we did in a magazine aisle. It turns out that in Wegman’s grocery store up and down the Northeast corridor, the magazine aisles range anywhere from 331 different kinds of magazines all the way up to 664. But you know what: if I show you 600 magazines and I divide them up into 10 categories, versus I show you 400 magazines and divide them up into 20 categories, you believe that I have given you more choice and a better choosing experience if I gave you the 400 than if I gave you the 600. Because the categories tell me how to tell them apart. Here are two different jewelry displays. One is called Jazz, the other one is called Swing. If you think the display on the left is Swing and the display on the right is Jazz, clap your hands.

[Applause]

Hey, there is some. If you think the one on the left is Jazz and the one on the right is Swing, clap your hands.

[Applause]

Ok, a bit more. Now it turns out that you are right. The one on the left is Jazz and the one on the right is Swing, but you know what: this is a highly useless categorization scheme. You know, the categories need to say something to the chooser, not the choice maker. And you often see that problem when it comes down to the long lists of all these funds. Who are they actually supposed to be informing?

My fourth technique: Condition for complexity. It turns out we can actually handle a lot more information than we think we can. We just think we got it take it a little easier. We had gradually increased the complexity. I’m going to show you one example of what I’m talking about. Let’s take a very, very complicated decision: buying a car. Here is a German car manufacturer that gives you the opportunity to completely custom-make your car. You’re going to make 60 different decisions to completely make up your car. Now these decisions vary in a number of choices that they offer per decision. Car colors, exterior car colors, I got 56 choices. Engine, gear shift: 4 choices. So now what I’m going to do is I’m going to vary the order in which these decisions appear. So half of the customers are going to go from high choice - 56 car colors, to low choice - 4 gear shifts. The other half of the customers are going to go from low choice - 4 gear shifts, to 56 car colors - high choice. What am I going to look at? How engaged you are. If you keep hitting the default button per decision, that means you’re getting overwhelmed, that means losing you. What you find is that people who go from high choice to low choice, they’re hitting the default button over and over again. We’re losing them. If they go from low choice to high choice, they’re hanging in there. It’s the same information. It’s the same number of choices. The only thing that I have done is I have varied the order in which that information is presented. If I start you off easy, I learn how to choose, even though choosing gear shift doesn’t tell me anything about my preferences for interior décor, it still prepares me for how to choose, it also gets me excited about this big product that I’m putting together. So I’m more willing to be motivated, to be engaged.

So when we recap, I have talked about four techniques for mitigating the problem of choice overload. Cut – get rid of the extraneous alternatives. Concretize – Make it real. Categorize – we can handle more categories, less choices. Condition for complexity. All of these techniques that I’m describing to you today are designed to help you manage your choices better for you - you can use them on yourself; better for the people that you are serving. Because I believe that the key to getting the most from choice is being choosy about choosing. And the more we’re able to be choosy about choosing, the better we’ll be able to practice the art of choosing.

Thank you very much.

[Applause]
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