10 September 2012

Not too…. But not too…

After four posts on “It’s NotDespite; It’s Because”, I’ve decided to come back a bit to decision design or how some other people call it choice architecture.

This post is about how choice can be influenced by the mere composition of the options one to choose from. One very important effect is “the compromise effect”, as scientists call it, or in more plain language, the “Not too… but not too…” effect.

Imagine that by a miracle you end up in a construction materials store and you need to buy polystyrene (which in case you don’t know is a material used for thermo isolation). Now I assume that most of you, the readers of this blog, don’t know too much about polystyrene and don’t worry. That’s how it should be… after all knowledge on polystyrene is something that most people can live without. Coming back to the store, you find three types of polystyrene available at the sore and these are:

Polystyrene A. 10 cm thick and costs 15 euros/ pack
Polystyrene B. 15 cm thick and costs 20 euros / pack
Polystyrene C. 20 cm thick and costs 25 euros / pack

Since most people would understand very little from this choice set, they would simply say something like: “Hey! I have no idea what these things mean, but I know that 15 is bigger (better) than 10 and that 20 is bigger (better) than 15. On one hand I don’t want the most expensive thing, while on the other hand, I’d better not buy the cheapest thing either. So… I guess the 15 cm one priced at 20 euros is a good choice.”

This is the basic reasoning going on behind the “not too… but not too…”. However, let’s forget a second about the choice set in that store and imagine that you have the following choice set:

Polystyrene B. 15 cm thick and costs 20 euros / pack
Polystyrene C. 20 cm thick and costs 25 euros / pack
Polystyrene D. 25 cm thick and costs 30 euros / pack

If our buyer would apply the same line of reasoning he or she would end up buying the 20 cm thick one priced at 25 euros.

You might think that this effect is consistent only for polystyrene which most people never buy, but this is not actually the case. The compromise or “not too… but not too…” reasoning is found and is consistent in many cases. At the same time you are right in the sense that there are some limitations to it. This effect does not occur when there is a very clear preference that the buyer has. So if you have to choose from 3 brands of juice, but you have a very clear preference for one of them, the effect does not occur. 

Similarly, when a buyer has extensive knowledge on the products characteristics and knows what he or she needs, then the effect will not occur. In other words, if our buyer is a constructions engineer, he or she will know that beyond 20 cm thickness, there is very little added benefit in thermo isolation, thus will ignore any option that is above this value. In addition, the engineer will know based on what the walls of the house that will be thermo-isolated are made of what type of polystyrene to buy.

The compromise effect occurs when we make infrequent purchases such as barbeque grills or refrigerators. It also occurs when the decision is made in an unfamiliar environment. Imagine that you’re on vacation in Bulgaria where they use the Cyrillic alphabet, thus you wouldn’t understand much of what’s written on products or labels. You don’t know the products in the choice set and you can’t really get too much information. Then… it will be a case of “not too… but not too…”.   

The key element here is how to design the choice set. What is the middle option in it?

In case you want a real life example, look at the choice options in Albert Heijn stores… usually it is something like this:

Euroshopper (the cheapest brand)
AH (the brand of the retailer or private label as it is formally called)
One or two branded products priced very closely

Pricing is exactly in this order… 

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