The Paradox of Surplus

Ben Schwartz’s Paradox of Choice (2009) coined the term “choice overload”, or the phenomenon by which “an increase in the number of options to choose from may lead to adverse consequences such as a decrease in the motivation to choose or the satisfaction with the finally chosen option” (Scheibehenne et. al (2010), p. 409).  While empirical evidence of choice overload has been mixed, and it seems odd that businesses that continue to expand the choices they offer continue to thrive in the real world, the idea seems like such a fundamental challenge to the foundations of economics that we shouldn’t ignore it.  However, one of the fundamental ideas behind choice overload: that increasing the number of options decreases the consumers satisfaction with the chosen option, is actually completely compatible with one of the basic tools of economic analysis.

Scheibehenne et. al describe one influential experiment that seems to point to choice overload:

In another study, Iyengar and Lepper (2000) offered participants a choice between an array of either six or 30 exotic chocolates. Participants who chose from the 30 options experienced the choice as more enjoyable but also as more difficult and frustrating. Most intriguingly, though, participants facing the large assortment reported less satisfaction with the chocolates they finally chose than those selecting from the small assortment. (p. 410, emphasis mine)

While satisfaction could have many definitions, if participants in the experiments were reporting their consumer surplus as their satisfaction, this isn’t necessarily surprising.

We can test this idea using this simple probability simulation.  We assume that a consumer’s value of all goods is uniformly distributed on the interval (0,100).  In the first sheet, we randomly present the consumer with five goods, and note the consumers highest and second-highest valued goods.  We then subtract the two to find the consumers surplus.  Running the experiment 30 times, we see that the average consumer surplus after being offered a choice of 1 out of 5 goods is 16.67 (σ=11.2).  When we increase the size of the choice set to 11 choices, the average surplus shrinks to 11.8 (σ=10.19).  Increasing the size again to 45, average surplus shrinks yet again to 2.17 (σ=2.05).  It’s not only possible, but highly likely that increasing the number of choices available to a consumer will reduce their total surplus.

One thought on “The Paradox of Surplus

  1. […] Two weeks agp, I discussed behavioral challenges to the cornerstone economic assumption that adding more choices can’t make people worse off, and posed the idea that the real driver behind the “paradox of choice” was the mathematical tendency for more choices to reduce consumer surplus.  Today, I’d like to examine a related, but I think more empirically relevant concept that, surprisingly, I first heard about in this talk on role-playing game design of all things. […]

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