Atlanta (September 11, 2009) — One person is offered samples of six different kinds of chocolates, another person, 30 samples of different kinds. Who is more likely to make a decision to buy chocolate?
Assistant Professor Tibor Besedes
The answer is from a well-known study in behavorial economics: those offered fewer choices are more likely to buy than those presented with the chocolate cornucopia. That conclusion has been widely applied in business. AT&T, for example, has many phone plans, but sales representatives discuss only three or four because people are more likely to make a choice if presented fewer options.
New research by School of Economics Assistant Professor Tibor Besedes takes the question to the next level. “We know that people are more likely to make a choice when offered fewer alternatives, but is the quality of their decision better when made based upon smaller or larger sets of alternatives?”
The context for Besedes work is healthcare, specifically Medicare D – the federal government’s prescription drug plan which offers seniors a choice of more than 30 plans. Funded by the National Institute of Health (NIH) National Institute on Aging, Besedes is among economists at Georgia Tech, Vanderbilt, Louisiana State University, and the University of Arkansas who were selected to study this aspect of ‘retirement economics.’
“Our study’s findings show that as the number of options increase, people do worse,” says Besedes. “With just four options, the optimal plan is selected 50 percent of the time. With 13 options, the optimal plan is selected 1/3 of the time. Given this data, one approach would be to reduce the number of options so that people will examine details and increase the chance of their making a better choice, but Besedes says that reducing the number of choices isn’t necessarily desirable: “In the case of healthcare, people don’t want the government limiting choice.”
A better answer may lie in the second major finding from Besedes study which indicates that the rate at which the optimal plan is chosen significantly differs by age with subjects under forty more successful in choosing the optimal plan. Besedes is working on ways to make the decision process more manageable for seniors. He is testing evaluative methods that help seniors identify the optimal plan by comparing a few alternatives at a time, moving through successive comparisons until all plans have been evaluated. The work could be used to develop software for the Medicare D website.
“The main contribution of this work is to develop tools or strategies to help people make better choices rather than restricting the choices that are available,” says Besedes. His work may be particularly timely with the nation considering government health insurance and it could ultimately be applied to assist purchasing decisions for everything from retirement savings plans to phone plans.
