Have you ever felt a twinge of panic in Starbucks when
confronted with a huge menu of options?
Have you ever looked at all those wonderful holiday destinations, and
then decided to go to the same resort as last year? Have you ever thought of moving to a new plan
for your mobile phone, gone to the website, and found it all too hard?

“Choice overload” was hardly a
problem for our grandparents for whom there was one generic product called
“milk”, one brand of beer in each state (Swan in WA, West End in SA etc), and
one telephone company, the government-owned PMG. And it’s still not a problem for Cubans and
North Koreans.

But is not choice one of the great
gifts of market liberalization? Economists
have generally assumed that the more choice we have the more likely we are to
find a product that meets our needs.

Sheena Iyengar of Columbia Business
School and Mark Lepper of Stanford University decided to test the
assumption. They conducted experiments in
supermarkets in which they had tables displaying a number of varieties of jam. Shoppers who stopped by the tables were given
a sample and a discount voucher which they could use towards buying jam. When
they displayed thirty types of jam, only 3% of shoppers actually used their
vouchers and bought jam, but when they had only six types on display, although
fewer people took samples, 30% of shoppers bought jam.

Perhaps it doesn’t matter if we depart
from the economists’ model of rational behaviour when it comes to jam or
Starbucks coffee. But Sheena Iyengar and
her colleagues found similar
results when she looked at choice of 401(K) pension plans – the US
equivalent of our superannuation plans. The more plans offered, even when simply
described, the lower was the probability of people making any choice; they would walk
away without any pension plan.

There is no hard and fast explanation
of this behaviour. Psychologists point
out that making a choice involves rejecting one or more options; the more on
offer the more we have to reject. Whenever we reject a jam (or a coffee,
holiday destination, or potential life partner) there is a feeling of
regret. “Perhaps I would have enjoyed
the Java Chip Frappuccino more.” The
greater our field of options, the greater our regret. Also, when people are presented with more
options they need more time to search and compare – think of those times when
you’ve reached the front of the line and are asked to choose, conscious that
you are holding up five people behind you.

Economists may think that the most
joyous activity in our lives is shopping.
In reality, we have many demands on our time, and, rationally, we
allocate our shopping time to those areas where we can gain most benefits. I
may actually enjoy browsing through a book or music store, but searching the
websites of phone companies hardly comes into the category of “enjoyment.” UK research, presented
to the OECD in 2006, showed that most electricity consumers did not take up
beneficial switching opportunities, and of those who did, a third switched to
worse plans.

For some products, such as health
insurance or banking, there may be a range of suppliers, but between those
suppliers there is no significant variation in terms of price or quality. And the most banal “choice” we are called to
make is between electricity, gas and water suppliers where the products are not
only identical but they are delivered through the very same pipes and
wires. The notion that we may be better off if those simple undifferentiated
products could be best delivered by a well-regulated public monopoly is heresy
for the policymakers, because “choice” is an unmitigated good.

In fact, the word “choice” has been
appropriated as an ideological weapon.
“Choice” of school, “choice” of health insurer, “choice” of
superannuation fund. Those who present a
more complex argument, qualifying this enthusiasm, are condemned as relics of a
bygone age of Soviet Central Planning.

It is quite rational, however, to
choose to have our choice constrained, for there are many situations where
exercising my choice makes it harder for you to exercise your
choice. Consider, for example, a society
where almost all of us would like to send our children to high quality public
schools where there would be mixing of ethnicities and social classes. But when some, in the name of “choice”, are
encouraged to set up their own schools, all schools become segregated by
religion, ethnicity or income, and we no longer have the option of mixed
schooling.

When there is a flight of the elites
from public education or public health care, people who would prefer shared
systems are denied their choice. In 1978
Thomas
Schelling, later to win the Nobel Prize in Economics, spelled out this
phenomenon in his description of “tipping”.
Ten years earlier Garrett Hardin, in his seminal essay “The
Tragedy of the Commons”, pointed out that we freely choose collective means
to limit our own freedoms when they impinge on the freedoms of others. (See the
editorial by Ken Davidson in the Autumn 2008 edition of D!ssent for an outline of
the relevance of Hardin’s work in broader public policy domains.) That’s why we
restrict our “choice” of carrying a handgun, using leaded gasoline, or watering
our lawn during a drought.

Yet our policymakers
persist with their simplistic notion of choice.
Paternalistically they deny us the freedom to make collective choices,
because they know, better than we do, that individual choice is good. And it’s because, in public policy, there is
an obsession with competition as a solution to all economic problems; that
obsession will be covered in next month’s InSight.