The Relationship of Choices and Risk

Do more choices make for better outcomes? Recent research published in the Harvard Business Review seems to indicate not. For businesses, the results indicate that focusing on one significant outcome is likely more effective than having multiple potential outcomes.

The relationship of choices and risk was at the crux of a study of 1,700 online participants who were asked about their interest in a potential lottery. In one case, lottery participants could win a 50-inch TV. In the second case, choices included the TV as well as a number of small, lesser-valued prizes such as a keychain, highlighters, and drink coasters.

Participants were far more likely to enter the TV-only lottery.

In a second study, participants were asked to evaluate a new drug. Some saw that the medicine could cause seizures. Others saw that it could cause seizures, congestion, and fatigue. Participants were more likely to choose the drug when there were more side effects mentioned.

Why the seemingly different thinking?

We found people generally believe that larger, more significant outcomes are less likely to happen than smaller outcomes. But the odds of the larger outcome happening seem even smaller when placed alongside the higher odds of the small outcome. For example, a 10% chance of winning a prize feels small already, but it feels much smaller when it is compared to a 60% chance of winning other prizes. As a result, people feel that they have less chance of winning an unlikely large prize, and that makes the whole sweepstakes feels less valuable.

Impact on marketing
The research has interesting consequences for business strategy. Marketers should consider focusing on one major potential benefit of a product or service instead of focusing on both one major benefit and a number of minor benefits. The former approach is more likely to generate more sales.

Similarly, employers may want to focus their employees’ motivations differently. If incentive plans focus on one major payout as opposed to a large payment and minor perks, employees may be more motivated to reach the bigger target.

Roots in microeconomics
The research is in many ways a prime example of rational choice theory, which forms the basis of most microeconomic theory. Under rational choice, an individual takes into account available information, the probability of outcomes, and the costs and benefits of each option. That individual uses that information to assert a preference and make a decision based on the available factors.

Choice Theory focuses a great deal on outcomes. When the number of outcomes is clearly stated, an individual will choose a course of action (e.g. entering a lottery or picking a medication) that results in the most rational potential perceived outcome.

In the case of the lottery options, the additional choices devalue the overall decision to enter the lottery with multiple prizes, especially given that most of the choices are of a far lesser value than the television. Customers acting rationally will choose to invest in the lottery with the most to gain.

Marketers can leverage this opportunity by creating the urgency and excitement around that particular feature or enticement. Doing so lets customers make the rational choice and purchase the desired product or service.