Saturday, January 15, 2011

Free to Choose? Why Free Market Economies Create Happier Populations

Adam Smith

In a previous article I discussed the moral foundations of market institutions and touched upon a subject which will be the focus of this piece. Specifically, whether the concept of the ‘satiability of needs’ is valid? 
If needs are satiable then it could be argued that they could be defined and, there is a valid argument for centralized provision.  If they cannot, then the best solution appears to be to allow market provision. Note that, the former argument does not imply a loss of autonomy, since autonomy is only seen as having a value if it leads to needs being satiated and-according to the theory-these needs can be satiated. 

I want to explore this problem of choices and needs from the perspective of the work of behavioral psychology in consumer choice.

Too Much Choice: People Only Want Jam Tomorrow?

One of the most cited pieces of research on consumer choice is Sheen Iyengar’s ‘When Choice is Demotivating: Can One Desire Too Much of a Good Thing?’ which is most famous for its study of jam selection. The lessons of this study (which is just one part of the work) are oft referred to in the ‘Apprentice’ television series, whereby contestants have actually received challenges which replicate the decision making in this research.

When faced with a large number of jars of jam, consumers appear bewildered by the options and bought less jam. Moreover, they were less satisfied with their purchases. On the contrary, faced with a smaller selection, consumers bought more and were happier with their selections.

Overall, in this work, Iyengar argues…

‘psychological theory and research affirm the positive affective and motivational consequences of having personal choice. These findings have led to the popular notion that more choice is better, that the human ability to desire and manage choice is unlimited. Findings from three studies starkly challenge the implicit assumption that having more choice is necessarily more intrinsically motivating than having fewer options.’

So it seems that consumers do not actually value having unlimited choice over limited choice. So long as that limited choice fulfills their needs. This argument appears to strengthen the idea that needs can be satiated, or at least, that a market with a few suppliers could in fact be better than one with many. An idea, that opens up the possibility of centralized creation of oligopolies, as opposed to completely free markets.

Heuristics in Consumer Choice

Iyengar’s work seems to conform to the principles of the work of Kahneman & Tversky. These two cognitive behavioral psychologists built up a body of research that affirmed the usage of heuristics or ‘short cuts’ in decision making under uncertainty. When faced with many options, humans go through a process of cognitively narrowing the options via using learnt rules or heuristics. If the effort expended in applying this process out cedes the marginal utility in making it, then the process tends to be discarded. In other words, no one can be bothered to decide over what jam to buy.

Free to Choose?

If you put the arguments- in the sections above- together than the case for needs being satiable, appears to be a strong one. However, they appear to go against common preconceptions over the benefit of more choice. Moreover, they also appear to go against the common experience of consumers being offered multiple choices in the marketplace. Supermarkets are full of multiple choices of goods and the internet is booming with long tailed retail. In Chris Anderson's 'The Long Tail' this growing aspect of consumer preferences is discussed in length.

So is this just academic research that falls apart in real world? In addition, is there something intrinsically valuable in having choices that consumers do not necessarily want to use? I suspect so.

Consumers Need Choices That They Don’t Use

It appears that the consumer values having a wide range of options even if it doesn’t appear to be the optimal way for them to make decisions. This perplexing conclusion is only elucidated if one accepts that the value lies in consumers feeling that they are free to make purchasing decisions of their own volition. In a later work, Iyengar expresses this view succinctly in “Knowing What You Like versus Discovering What You Want: The Influence of Choice Making Goals on Decision Satisfaction

‘Despite the detriments associated with choice overload, consumers want choice and they want a lot of it. The benefits that stem from choice, however, come not from the options themselves, but rather from the process of choosing. By allowing choosers to perceive themselves as volitional agents having successfully constructed their preference and ultimate selection outcomes during the choosing task, the importance of choice is reinstated.’

I am sympathetic to this argument. However, this should not be taken as a validation of the argument that all that need be done is make sure that consumers feel they are making autonomous choices, when in fact they are being manipulated.

The value not only lies in feeling autonomous but also in being part of the epistemic process of the market, whereby tacit knowledge of wants and purchasing desires is expressed through market pricing mechanisms. Consumers want to feel they are part of this process, not only because it is the best way to utilize resources, but people value being free to choose.

Satiability of Needs?

So what does this mean for the satiability of needs? I think that it should be recognized that market mechanisms and freedom to choose should be seen as an end, rather than a means to achieve wants. Whilst needs are not necessarily satiable, consumers are happier when they are presented with choice and the feeling that they are part of the iterative process of defining consumer choice.

In conclusion, being part of the market process appears to be as important as having needs satiated. The implications for social cohesion are clear. Consider two economies which happen to have equal provision of the same type of goods. One has them provided by the market, the latter via centralized control. The one that has it provided via the market mechanism is likely to have a happier population than the latter.  Moreover, it could be the case that the poorer segments of free market economies are happier than those equally poor in a command economy, even though they share the same amount of ‘autonomy’ in terms of being able to enjoy goods.


Anderson, Chris 'The Long Tail'  Random House Books, 2007

Iyengar, Sheena ‘Knowing What You Like versus Discovering What You Want: The Influence of Choice Making Goals on Decision Satisfaction’

Iyengar, Sheena ‘When Choice is Demotivating: Can One Desire Too Much of a Good Thing?’ Columbia University

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