At the start of the 1990s Williams-Sonoma offered a single bread machine for $275. Then they introduced a new, larger bread machine for $429.
The expensive bread machine did not sell that well.
But, something else surprising happened: the original, less expensive bread machine sold better than before. In fact, sales nearly doubled.
The thing is, most of us don’t know much about bread machines. We couldn’t name the top five bread machines on the market if we tried. When we see a single bread machine for $275, we have no clue whether that’s cheap or expensive.
When another bread machine is added for $429, we still don’t know much about bread machines. But now our brains have some information—some fodder to build on. There is context for our decision, and we use that context to find the most attractive option.
We now know that $429 for a bread machine is a lot of money when we can get one for a mere $275. That original $275 bread machine looks a lot better than it did alone. In fact, it looks so good that a good chunk of people are going home with a brand new $275 bread machine.
This of course happens quickly; subconsciously. We don’t realize that we’re relying upon context to make a decision, but we are.
The idea we’re teasing out here is: context plays a huge role in the decisions we make.
The Role of Context in Decision Making
It’s commonly assumed that people have some “master list” of preferences. We like apples the most, then oranges, pears, and so on.
The context of our decision shouldn’t impact our choice. It shouldn’t depend on the presence or absence of other options. But, it does!
Add an expensive bread machine and the cheaper option sells more.
Draw a circle surrounded by smaller ones and it will appear larger than it is.
Draw a circle surrounded by bigger ones and it will appear smaller than it is.
We have context-dependent preferences.
When we make decisions, we compare each option with the available alternatives and our past experiences. This flies against the grain of traditional economic thought and it can change the way we look at decision making.
Itamar Simonson and Amos Tversky conducted several experiments on context-dependent preferences in the 1990s.
In one experiment, people were given a catalog with microwave ovens and asked to choose one to purchase. Group One saw two microwaves on sale for 30% off regular price: an Emerson for $110 and a Panasonic for $180.
The groups were relatively split; 57% chose the Emerson and 43% chose the Panasonic.
Group Two saw these same two microwaves and a third: a Panasonic for $200, 10% off it’s regular price.
This time, 13% of people chose the $200 Panasonic, but 60% of people chose the $180 Panasonic. That’s a 17% increase from Group One.
The mere presence of a more expensive Panasonic microwave made the cheaper one more attractive, and more people chose it over the Emerson. The two Panasonics seem fairly comparable, but in the context of the second group the $180 Panasonic seems like a better deal.
The interesting thing about this is that we seem to be complicating the choice task in this scenario. Because we are boundedly rational humans, we often try to “reduce effort and minimize the cost of thinking,” and this leads to simple solutions. But, Simonson and Tversky argue, in this case we’re doing the opposite.
We don’t compare each Panasonic with the Emerson individually. We actually complicate the choice task by weighing each option’s characteristics. Simonson and Tversky propose that this stems from an “attempt to achieve better resolution and identify the best choice,” rather than to simplify the task.
The importance of context in decision making might seem straightforward, and that may be true, but we’re not always aware of it. This insight, write Simonson and Tversky, “could lead to more thoughtful decisions.”
Wherever there is choice, there is possibility for manipulation. Political elections. Job recruitment. The grocery aisle. Appliances. Ultimatums. Simply adding or removing options can have massive impacts on choice, manipulating the outcomes.
There will be irrelevant factors presented alongside the ones that matter. The solution is simple—to ignore the “irrelevant” information and compare options directly.
This works in the same fashion as figuring out which of those two center circles is larger: ignore the circles in the background and compare the ones that matter. They are the same.
The importance of context-dependent preferences extends beyond finding “a solution.”
The way we look at decision making changes when we realize the role of context. It allows for more irrationality in the way we understand decision making, and as a result, a more realistic understanding of the world.
Appreciating the role of context can help us build a better framework around decision making.
A Little Challenge For You
As you move about your life over the next week, I challenge you to try something: try and observe the context of the decisions you make.
Just observe the environment, the choice set, the “irrelevant” factors. Observe the options on the lunch menu as you decide what to eat. Observe the different subscription options when you consider signing up for an online service (most offer three or four levels).
Many of our decisions are habitual and the context effects aren’t very strong (if we have a strong preference for Pepsi, we’ll almost always ignore coke), but we still make several decisions a day that involve contextual effects.
If you do try and pay attention to this, please let me know how it goes for you, what you noticed, how you felt, if it was easy/difficult—I would love to hear from you!