Feb 15 min read

Making confident decisions in a world drowning in data

Updated: Feb 3

We are culturally and genetically wired to seek more information and alternatives to make the best decision. The best decisions lead to the most value for us...what we economists call consumer welfare. The challenge is that without decision ability and availability, making the best decisions in today's information-abundant world is not guaranteed. Using choice architecture and a consistent, repeatable decision process is essential for making the best decisions.

About the author:

Jeff Hulett is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM. Today, Jeff is an executive with the Definitive Companies. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his new book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions -- at jeffhulett.com.

Traditionally, economists assume that more choice leads to more consumer welfare. Also, economists assume that, in the aggregate, people make rational decisions to optimize their own welfare. In earlier days, when available information and choice alternatives were scarce, more choice was more likely to lead to higher consumer welfare. These were typical decisions made before the information age. As an example, think of a very real decision facing many people just after the American Revolution.

"Should I get on this Conestoga wagon and head west where land is free and the soil is fertile?"

-- Alternatively --

"Should I stay in Boston and potentially starve?"

Then, the operative question became: Where do I find the information to help me decide?” Before the information era, that information was more difficult to come by. But the decisions were much simpler then. Not starving was the obvious best choice for many. That "Go west, young man" decision example is more like the ancient "fight & flight" decisions our evolutionary-tuned brain is very good at. Many people decided to go west and this decision sparked one of the most economically prosperous migrations in history -- the settling of the American frontier.

In today's information age, the world is generally skewing away from information scarcity and more toward information and alternative abundance. In a world of information and alternative abundance, the premise that choice leads to a consumer's welfare improvement is not necessarily accurate.

In an information and alternative-abundant world, more choice CAN lead to more consumer welfare. However, the degree to which more choice leads to consumer welfare depends upon:

The decision-maker's abilities, and,
The decision availability of that chooser.

This moves the chooser's decision locus from their genetically predisposed "gather data" locus to the need to apply the "complex decision-process" locus. Because our brain has not yet evolved beyond the "gather data" locus, our ability to make complex decisions is very challenging.

Without an able AND available chooser, more choice CAN lead to reduced consumer welfare. Less consumer welfare occurs because the chooser is overwhelmed by the additional data available to inform that choice. Without an effective decision process, the chooser cannot discern between the signal and the noise. The sense of being overwhelmed is what cognitive scientists call a "bandwidth tax." [i] This is a tax that adds a cognitive load to our decision processes, impairing ANYONE carrying a high bandwidth tax. This impairment leads to lower confidence and lower decision accuracy. Choice architect and psychologist Barry Schwartz [ii] sums up the information age choice concern:

“Learning to choose is hard. Learning to choose well is harder. And learning to choose well in a world of unlimited possibilities is harder still, perhaps too hard.”

A data-abundant example: Today's common car buying environment can have 1,000s of decision combinations. This is owing to many criteria, like color, seating capacity, environmental impact, fuel efficiency, sound system, performance, and many others. Then, overlay 1,000s of potential car alternatives on dealer websites and aggregators like Trucar. The point is that the car decision is surprisingly complex because of data abundance. Today's challenge is knowing what data to subtract.

The challenge goes beyond the absolute number of decision criteria or car alternatives. It is the interaction of the criteria and alternatives that causes geometric growth in decision combinations. The fact that each weighted criterion must be used to evaluate each alternative drives the decision complexity and bandwidth tax.

Also, consumer products and services companies have an incentive to take advantage of our brain's data scarcity predisposition in the data-abundance world. This means we need to be careful because the best decision for you may be misaligned with the objectives of those companies selling products. [iii]

Misalignment in the data-abundance world example: Most consumer products companies have their own choice architecture to "help" you make a decision. Think of Tesla, Amazon, Netflix, your favorite restaurant, political parties, or a company 401k provider. All of them have choice architecture tools (like websites, smartphone apps, menus, sample ballots, etc.) to help you make a decision. The challenge is, and studies show, that the seller's choice architecture is designed to help the organization optimize its profitability or some other objective. [iv] The best choice for the seller does NOT necessarily provide the optimal outcome for you.

Decision abilities and availability may be enhanced. This helps reduce the bandwidth tax and leads to higher consumer welfare. Decision abilities may be improved by the tools of behavioral economics, called choice architecture. Decision availability relates to the time capacity available to the chooser at the time the decision needs to be made. In general, better decision abilities increase decision confidence and the efficiency of the decision-maker. Increased confidence and decision efficiency will lead to increased capacity for decision availability. It is a positive, reinforcing cycle leading to better decision outcomes.

In summary: We are culturally and genetically wired to seek more information and alternatives to make the best decision. The best decisions lead to the highest consumer welfare. The challenge is that without decision ability and availability, making the best decisions in today's information-abundant world is not guaranteed. Using choice architecture and a consistent, repeatable decision process is essential for making the best decisions.