Making Money From the Paradox of Choice

In parallel to 3GSM, Ogilvy runs a telco conference in the beautiful Dolce Sitges Hotel, about 35km from Barcelona where the main even is. Sitges is a vacation town for the Barcelonians, a quiet place fit for a more exclusive event of 150 as opposed to the madhouse of 50,000 that 3GSM is. Thanks to my friend Ajit Jaokar who was speaking at the conference, I went along and ended up having dinner with Rory Sutherland, the owner of one of the longest job titles–Executive Creative Director and Vice-Chairman, OgilvyOne London and Vice-Chairman, Ogilvy Group UK. The humor of corporate hierarchy aside, Rory is a super-sharp Renaissance man who’s able to switch subjects at dinner faster than a croupier moves chips. Having had the chance to think through some of the topics in more detail, I wanted to share some thoughts that are applicable to a world where content supply and demand are spiraling out of control.

The Paradox of Choice re-introduced an old idea that more variety is not necessarily better. Sorting through choices takes effort. Further, since a “perfect” choice may not exist, even the knowledge of alternatives which are better in some respect can make us less happy with our ultimate choice. (There are lots of examples of this in published work. Rory’s blog links to a fascinating piece of research which suggests that one of the key reasons why people like to shop the organic sections of supermarkets is that they are presented with less choice.) This type of reasoning flies in the face of traditional neoclassical economics, which considers humans to be rational utility-maximizing creatures. More choice is always Pareto optimal, i.e., no worse than less choice. Psychology experiments suggest that’s clearly not the case. (One of the reasons why I abandoned economics was that I didn’t see many Homo economicus walking the world. It’s more interesting to think about how people actually behave than about how they should behave.)

Well, if we are not running triple stochastic integrals in our heads to optimize decisions based on all available information, how do we make choices? Without getting into details, the basic idea is that we use heuristics. That finding is supported by both theory and experiments from Herbert Simon’s work on satisficing (a combo of satisfying and optimizing) which spanned cognitive science and AI to evolutionary psychology to behavioral economics. The basic theme of heuristics is that they are quick and dirty (computationally efficient from a wetware standpoint), use local information as opposed to all available information and are much influenced by emotions.

Side note: for anyone interested in these ideas, especially in the context of how humans fail to accurately estimate probability and risk, I highly recommend Fooled by Randomness. I had missed that book despite my interest in the area and have to thank Gourdon Gould of ThisNext for bringing it to my attention. It’s a must read for anyone spending time in the financial markets, for economists and for entrepreneurs.

We live in a world where content choices are increasing at an increasing rate, from more cable/satellite channels to user-generated content to everyone dumping their content vaults on the Net. What hasn’t changed is the 24hr day (though I hear Fox execs are offering a lot of money for ideas on how to eliminate that constraint. ;-)). Are we better off? Sure, but… There are at least three reasons why more does not always equal better for individuals:

  • The ratio of signal to noise has gone up. I have no good data to support this other than the logical argument that signal (meaningful data) changes relatively slowly as it is tied to things of importance and lasting value. I just can’t imagine there being enough new “signal” to justify, say, the rapid rise in the blogosphere content. When someone who’s not an expert on a subject (for example, me on most of the matter covered in this post) writes, the resulting text tells more about the writer than about the subject. Now, noise to some is signal to others, which is absolutely true, but that just brings the point that…
  • Search and discovery costs have gone up. Again, I don’t have any good data on this, but my personal experience is that I spend more time searching for the right thing because I assume it exists and I’m less likely to accept the top choice my search engine gives me. Past data I’ve seen (I can’t find good links to it to share here) suggested that the average person puts 2-3 words in a search query + clicks the top 3-5 links in order until she satisfices her search request. More recently, I’ve heard from search engine startups and the likes of Google and Yahoo that average search term length is going up. That’s used to suggest that search engine users are becoming more productive. In addition, they may be getting more frustrated with the poor quality of the search results from simple queries and have to work harder to find what they are looking for.
  • Information asymmetry has increased. In the past, there was not only less information available but, also, much of the same information was available to most people. (Think of the days of radio.) People from businessmen to your next door neighbor could make stronger assumptions about what other people knew about. Nowadays, I’m constantly caught having discussions with businesspeople and friends from the standpoint of significant information asymmetry. It takes time and effort to get closer to parity so that joint decisions can be made, e.g., which tech conferences should Polaris sponsor this year.

So, what’s the solution? There are four axes to consider:

  • Go someplace where this is not a problem. What I’m describing is primarily a developed economy problem. People in Cuba aren’t troubled by too much choice. (I grew up in Communism so I know what I’m talking about.)
  • Increase the available time to consume content. The supply of disposable time to consume content is bounded by the 24hr day but has been growing steadily over the past decade. TiVo and DVRs in general have allowed people to watch TV at odd hours. Despite the best efforts of some larger corporations, the Net has brought entertainment to the workforce. Mobile phones increasingly fill spare minutes with entertainment. And, yes, we have product placements in TV shows and virtual worlds as well as ads in elevators (a true startup innovation) and bathroom stalls. Unfortunately, we are getting to the point of strongly diminishing returns. It is very difficult to come up with another disposable hour of time in our busy lives. Therefore, much of content consumption will be replacement-based, which leads to…
  • Make content more attractive to the audience. The Net’s “infinite number of channels” and low bandwidth costs (broadband penetration is what enabled MySpace and YouTube) have presented distribution options for both niche and user-generated content. Technology is also becoming much better at putting content in context. (An interesting point that came up at the Ogilvy dinner is that everyone is chasing mobile entertainment while they should be chasing content in context. Rory cited some research on the subject indicating overwhelming user preference for the latter.) Still, the more fragmented the content ecosystem, we have to…
  • Make discovery significantly easier. This is probably the most exciting area and one where I’m focusing some of my time as an investor. Because content consumption often begins with discovery, the impact of better discovery tools is significant. Google’s market cap is built not on the fact that they sell advertising but on the fact that for many people discovery begins with their search engine. In short, to make money from the paradox of choice you have to make the large choice set seem small and relevant and that’s what discovery is all about.

So far, I’ve focused primarily on content but the same arguments apply to products. Especially in developed countries, it’s becoming harder and harder to find reasons why a new product should be purchased (the full kitchen/wardrobe/house problem is the real-world equivalent to the 24hr constraint). Manufacturers are developing systems for mass customization of products. For example, at 3GSM I saw a startup, which specialized in producing phones for niche audiences. They had a roadmap of dozens of designs, all on a common platform. And product discovery is perhaps an even more relevant problem than content discovery since products are often much more complex to evaluate.

More on the opportunities in discovery in my next post.

About Simeon Simeonov

Entrepreneur. Investor. Trusted advisor.
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2 Responses to Making Money From the Paradox of Choice

  1. Jerry says:

    I agree with you on several points. More is not always better. I’ve spent the majority of my career learning to provide less choice. This is because I was taught that people who are the drivers in an organization are too busy to be presented with a lot of choices so only show them the 2-3 best in your bag. Analytical people (i.e. engineers) are always interested in being presented with more choices. They can never get enough and are people that are best avoided!

    When I do a search on the internet I would also appreciate less choice. That’s because, despite my best efforts at creating meaningful queries (boolean, etc), I’m usually presented with a handful of useful results (sometimes not even that) and a trillion useless ones. When searching for something arcane, it rarely comes up in the top results. What happens is that I end up wasting an enormous amount of my time clicking through a variety of the top 40-50 links hoping that the search engine found something meaningful. I need to discipline myself into never going beyond the first results page!!

  2. Pingback: Shopping vs. Buying « HighContrast

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