Firm’s perspectives on how ‘decision paralysis’ affects their business and decision-making, and how to address the issue.
Ever felt stumped by what to watch on YouTube or settled on some lousy food because you did not know what to choose? Well, you just faced decision paralysis, which is the complete inability to decide because of too many choices. In this short essay, we will be discussing the whats, whys and hows about this phenomenon that affects the businesses and the general economy.
Consumers’ inability to choose because of choice overload will result in the consumers not purchasing any goods and thus producers are not able to maximise profit. Decision paralysis stems from the human brain’s lack of capacity to process so much information. Humans simply cannot form objective judgements of the value of the many different items and make a choice between them. When there are so many choices, we mere mortal beings are unable to make the most optimal choice that would maximise their consumer welfare. There is a combination of factors — the fear of making the wrong decision and the immediate need to make a choice this instant without being certain of the yield, that leads to consumers’ indecision. Producers provide a wide array of choices, believing that diversifying the consumer’s choices will increase their profits since there are more choices to suit their personal taste and preferences. However, this will actually result in a loss of profits due to decision paralysis.
To illustrate this, we will look at one classic experiment that was run by psychologists Sheena Iyengar and Mark Lepper in a San Francisco supermarket in 1999. Customers were randomly asked to sample jam and the experiment would see who bought jam in the end. Half of the customers were allowed to sample 24 different jams while the other half were allowed to sample 6 different jams.
According to traditional economics, more variation and consumer choice would maximise utility and consumer welfare, hence offering 24 jams should lead to more jam purchases.
Surprisingly, the results observed were the exact opposite of this traditional theory. Only 3% of those who sampled 24 jams ended up buying jam, while a whopping 30% of those who sampled just six jams ended up buying. Hence, this shows that more choices leads to worsened decision paralysis and hence erodes profits. For supermarkets which are taken to be firms, this means that providing too many choices would lead to consumers not even making a purchase. Hence, demand for their goods decreases and profit decreases. If the cost of supplying these goods is more than the profit earned from selling the same goods, the supermarkets (firms) will experience a loss in total revenue.
As seen in Fig 1, for an oligopolistic or monopolistic firm that was making supernormal profits such as YouTube, when consumers are met with decision paralysis, demand falls as seen by the leftward shift of the demand curve from DD0 to DD1 and thus will lead to subnormal profits.
Fig 1: Decrease in profits for firms such as YouTube due to decision paralysis
Here’s a brilliant example of decision paralysis being overcome — YouTube. The company earns through ad revenue which increases as the number of streams increases. For some context, YouTube generated $15 billion in 2019, $11 billion in 2018, and $8 billion in 2017 to Alphabet from their ad revenue. With the gargantuan amount of videos on YouTube (500 hours of videos are uploaded each day), one might think that individuals will find it difficult to choose which one to watch, which potentially results in the decision to not watch anything at all. With no viewership, no ad revenue is generated and YouTube will be unable to earn. Thus, theoretically, decision paralysis leads to the loss of profits to producers like YouTube.
However, there are a few measures for producers to take in order to combat decision paralysis and prevent it from affecting their business. Two of these ways will be explored in further detail below.
Firstly, through analysing consumer’s data and history, firms like Youtube will recommend videos that cater to consumers’ personal preferences, narrowing the choices of videos to watch and thus alleviating decision paralysis. A smaller pool of choices will result in higher ability to make decisions as the need for mental processing has been minimised. This is also a marketing strategy that encourages viewers to continue watching videos that are similar to their interests, so that they can stay on the app for as long as possible, and thus seeing as many ads as possible.
Secondly, companies can take advantage of human tendency to follow others by using algorithmic recommendations. When one sees what others are viewing, they are more inclined to check it out too. Thus, this will generate greater viewership for the firm and would also help consumers make a choice as the assumption made would be that more people viewing equates to the better choice. With increased viewership, the firm would be able to maximise profits. This can be seen through how YouTube and many other social media platforms curates a daily ‘Trending’ page, where they recommend the most popular videos to users.
Decision paralysis is commonly experienced in our society, where consumerism is the way of life. Products are being shoved in our faces all the time and advertisements are telling us to buy things! How on earth do we decide what to buy?! In our essay, we hope to have enlightened you on this daily struggle of consumers and how this impacts businesses, as well as how businesses strategies to overcome this problem.
by: Myra Koh Yujie (20-A6), Lim Kia Hsuen Sheryl (20-A3) and Laura Choo Suyin (20-E2)
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