Contextual Decision Making

Source: University of Chicago, 2008

Numerous studies demonstrate that seemingly irrelevant factors influence people’s decisions.  Perhaps the best known examples of such influence are context effects. A consumer exhibits context effect if her choice between two alternatives systematically depends on the presence of other options.

One of the most widely studied context effects is the compromise effect (Itamar Simonson 1989), which refers to the finding that people tend to choose the middle option. More precisely, when three alternatives are available, the middle alternative is chosen more often than when it is paired with only one other option.

Another behavior that is seemingly inconsistent with a well-defined preference ordering is choice overload. In choice overload experiments (e.g., Sheena S. Iyengar and Mark Lepper 2000), customers are less likely to make a purchase if more products are added to the choice set.

The tendency to select the middle option thus naturally arises when there are consumers who are unsure which option is best for them, but know their tastes are middlebrow. Choice overload comes as no surprise if excessive product lines reduce consumers’ information about which varieties are likely to suit them. Thus, contextual inference parsimoniously explains seemingly disparate behavioral anomalies.

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