Too Many Choices; an Analysis paralysis conundrum

Every basic economics textbook concludes that the introduction of more choices should inherently lead to cheaper prices. However, in practice this isn’t necessarily the case. A number of empirical studies have been performed under this subject with results indicating that sales of a given product do not go up in case more choices are made available for that product. To understand why key economic principles fail in this regard we must take into account Behavioral economics and the concept of Analysis paralysis. Analysis paralysis refers to a state of over-analyzing a situation so that a decision or action is never taken, in effect paralyzing the outcome. 

A lot of research has been conducted in attempts to conclusively understand the impact of Analysis paralysis. As per a study supervised by Deloitte, Analysis paralysis brought on by the inability to choose between options is the result of fatigue and cognitive overload. While most consumers urge upon the need for more readily available choices, the act of eventually making a choice among the endless options available becomes a burden. In most of the cases, having unlimited options appears to provide access to all the relevant information. But in reality, this often leads to the fear of making the wrong decision and in due course ends with the consumer making a non-optimal decision. 

The intuition behind this concept can be readily studied under the public policy sector. Public policy decisions often appear based on an assumption that providing more options, more information, and greater decision-making autonomy to consumers will produce better outcomes. After thorough research and empirical applications, it has been argued that more options, information and autonomy can also lead to unintended negative consequences. The basic theory underlying Why “More is Better” policies can backfire revolve around the fact that in many situations consumers making the key decisions do not actually know what they prefer and as a result, use mental shortcuts (called heuristics) and construct their preferences on the spot based on internal and external cues available at the moment. Providing such a consumer with an excess of choices not only overwhelms their cognitive abilities but affects their ability to even grasp fairly simple concepts. Finally, having more options often leads to work-induced regret and dissatisfaction because individuals tend to make more comparisons and often face more trade-offs & other alternatives and, thereby, have a greater potential for regret.

Number of effects of the Analysis paralysis due to information overload have been witnessed in the telecommunication industry. The abundance of information that is readily available in regards to this industry has made it difficult for all but even for the most technologically savvy to choose the products best suited to their needs. Customers who are unable to make a decision based on the attributes available tend to make a choice based on price solely, only to realize that the product did not meet their requirements in the first place (Lally & Rowe, 2009). Similarly, when provided with multiple options consumers choose the least expensive choice available about 65% of the time because they believe it to be the better choice (Redden & Hoch, 2011). When a customer encounters various options for things such as the basic service fee, additional features and cost for usage overages, customers tend to choose plans which greatly exceeds their requirements, significantly overpaying each month.  Similar behaviors have been exhibited by customers when asked to choose a retirement plan, energy plan among many others.

A lot of companies around the world take into account the phenomenon of Analysis paralysis also known as decision paralysis and using it to their own advantage. While on the upfront retailers are offering a number of choices to their customers, in reality they are burying them under an avalanche of options that leads to bad or no decision at all. An important example to understand this would in context of Australia’s Electricity market. Across different states within the country, customers have a vast variety of retailers to choose from. Nonetheless, as reported by the Australian Consumer and Competition Commission, electricity prices and profit margins for Australia are among the highest in the world. Australia’s biggest electricity company, AGL, despite the recent aftermath of the pandemic is expected to make an underlying profit (after tax) of between $500 million and $580 million, as stated in the 21 December 2020 trading update on the company’s website. Depending on the region a consumer is living in, AGL offers a number of plans which includes the AGL Basics plan, Savers Online, Everyday, Freedom, Standing Offer, Essentials, Essentials Plus, and so on. Each plan, in turn, has four to eight tariff type options: Flexible Price, Time of Use Interval, 5 Day Time of Use, Single Rate, Two rate: single rate with controlled load, Single Rate Demand Opt-in, and so on.  A simple calculation would lead to approximately dozens of price plans from just one retailer. All these options appear to lead to a competitive market but in reality, it allows retailers to charge more and gain better profits. 

Figure 1: Changes in market share and HHI, 2015-2016 TO Q2 2019-2020 (electricity)- residential

As a customer, one will need to make a conscious effort to overcome Analysis paralysis. More time needs to be carefully devoted when comparing analyzing various offers relevant to a product. A number of readily available tools are present for a customer to so online. In case of the energy sector Australian government’s energy comparison website can be of immense help. Companies too can help prevent paralysis by designing solutions that factor in consumer mind-sets and helps them actually make viable decisions. Building in incentives to act—or disincentives for inaction—and reducing barriers can help companies move consumers from consideration to action.

References:

  • Retail energy competition review (2020). [Data file]
  • Lally E, Rowe D. Impossible choices: Complexity and dissatisfaction in the telecommunications consumer-service provider relationship. In: Papandrea F, Armstrong M, editors. Record of the Communications Policy and Research Forum 2009. Sydney, Australia: Network Insight Institute; 2009. pp. 354–370.
  • Redden JP, Hoch SJ. Simplifying difficult calculations: Consumer choice of two-part tariffs. Journal of Product & Brand Management. 2011;20(7):549–556.
  • Rony K, Dr. Anil RP, Dr. Asha N. Application of Paralysis Analysis Syndrome in Customer Decision Making. Procedia Economics and Finance 11. 2014:323 – 334
  • Xavier P. Consumer information requirements and telecommunications regulation. Information Society. 2008;24(5):342–354.