DE LA SALLE UNIVERSITY

School of Economics Economics Department

THE DUAL NATURE OF CHOICE

Evidence from a Field Experiment in Bicutan, Paranaque City, Philippines

In Fulfillment To the Requirements In THSECO1 3rd Term, SY 2013-2014 To Be Presented to Dr. Marites Tiongco

Submitted by Catacutan, Joyce B. Romasanta, Katrina Marie A. Tan, Christofer Lawrence A. Zulaybar, Ma. Isabel E.

ABSTRACT:

In a modern society, it is a common supposition that the more the choices are, the better off a person is, hence, in the case of the Philippines, the increase in demand of goods over the years has motivated several industries to introduce a wide set of variety of products that would allow a generation in profit. Although microeconomic theories suggest that more variety is better, studies have proven that choice overload may happen due to the fact that a greater variety could potentially increase the chances of regret for the consumer, hence, resulting for the consumer to choose the easiest and less risky option, which is to not choose anything at all. Hence, in order to see if these theories can be proven, the researchers will conduct (JOYCE PART 3 SENTENCE). Due to the binary nature of the independent variables in this paper, the researchers will use the logit model and once the experimentation and regression have been completed, we will create policy recommendations that are applicable to not only the store but the Philippine market.

CHAPTER 1: Introduction On an average, a human being makes about 70 decisions per day. In fact, todays market democracies have shown that individuals are faced with an ever-increasing number of options to choose from across many domains. Because consumers are said to have heterogeneous preferences for variety, this observation has lead firms introduce new products, which are closely in line with the demands of certain groups of consumers. This results to a proliferation of choices, which creates difficulty for an average consumer to find their ideal product or a set of goods. This can include places to live, career paths, holiday destinations and a seemingly endless number of consumer goods. Hence, there is no denying that those in a developed society counter an abundance of choice and usually revel in it. (Scheibehenne, Greifeneder & Todd, 2010). In the world of retail, there are certain advantages to the expanding plethora of choice such as a reduced risk of missing a superior option, competitive pricing, as well as a better chance of finding a service or product in line with our individual preferences. However, the relationship of choice and well-being is actually not as obvious as what the usual wisdom would suppose (Flynn, 2013). In consumer psychology and behavioral economics, it was revealed that while people are usually attracted a variety of choices, an overabundance of choices can sometimes lead to adverse consequences. These effects of extensive assortments whereby the consumer will become so overwhelmed with options that one will have a decreasing the motivation to make a choice, to commit to a choice or to not make a choice at all. Another is that one can have a dwindling preference strength and satisfaction with the option that was chosen and obtaining negative emotions such as regret and disappointment. These occurences have been selectively referred to as choice overload, the problem of too much choice, overchoice effect, too-much-choice effect or the tyranny of choice and choosing from a rising number of products can sometimes be referred to as consumer hyperchoice. In all of these phenomena, a common notion of adverse consequences is an increase in number of options to choose from. Literature refers to this common ground as choice overload hypothesis (Scheibehenne, Greifeneder & Todd, 2010). In modern society, it is widely and more commonly believed that the more choices we have, the better off we are. The desire for choice tends to be infinite. However, the choice overload hypothesis has completely debunked this belief. It also has significant theoretical and practical implications. In a theoretical perspective, it challenges most choice models in economics wherein expanding a choice set cannot make decision makers worse off and in psychology whereas it violates a regularity axiom, a cornerstone of classical choice theory. In a practical view, a reliable decrease in motivation or satisfaction because of having too many options would oblige public policy makers and marketers to re-assess their tendency to provide an ever-increasing assortment of options since offering less may allow them to profit more. Given these implications, it is important to be able to further understand the conditions under which adverse effects of this choice overload are most likely to transpire (Lusk & Norwood, 2007).

In the case of the Philippines, the country has been producing more and more goods to suffice for the countrys growing population of 2 percent every single year. In fact, the food and beverage industry is expected to grow between 5% and 10% through the coming years driven by high demand and a rapid growth in the hypermarket (Valencia, 2012). As more goods are being added to the roster, new innovations and new products are introduced due to the heightened competition in the industry. Statistics show that in a Nielsen Global Survey of New Product Purchase Sentiment, an estimated 77 percent of Filipino respondents welcome new product options. Aside from this, an estimated 80 percent of Filipino consumers would buy new products from familiar brands rather than switch to a new brand. This trend reveals a high level of brand loyalty among domestic consumers (Lucas, 2013). However, in the United States, it was shown that many retailers have increased profits by reducing the number of products on the shelf as consumers move toward familiar brands (Richards & Park, 2013). Hence, the researchers truly question if a trend of less products is a strategy that the Philippines can adopt to further heighten the success of the retail market.

CHAPTER 2: Theoretical Framework In basic microeconomic theory, the theory of non-satiation suggests that more is always better. That more people want more of a something rather than less of it- as this increases their probability of getting a higher satisfaction out of that good. Furthermore, under the theory of rational choice, it states that having more, rather than fewer choices is much more desirable and intrinsically motivating (Iyengar & Lepper, 2000). With this in mind, one would suggest that in an actual setting wherein people are given a chance to choose from a variety of goods, that person would have bigger chances in buying that product. However, recent studies have shown that sometimes having a wider variety to choose from results to people buying less of that product.

In a study done by Iyengar and Lepper, they found out that although it may be appealing for consumers to be given a chance to choose from a variety of products. The negative externality to that is it undermines the choosers future satisfaction and motivation (Iyengar & Lepper, 2000). Resulting for consumers to buy less or to not buy that product. Psychologist and economists call this phenomenon as choice overload. Choice overload usually hap pens when it gets too overwhelming to choose a product to buy, therefore, resulting for them to not push through the decision making process. Consumers go through analysis paralysis as they are pressured to filter through products in order to make the right choice (Schwartz, 2013). Hence, for them to likely choose the easiest and less risky option of them all, which is to not choose at all. In relation, as the assortment of goods grows, chances are consumers will feel more dissatisfaction from their purchase as the propensity for one to self-blame/regret is higher (Flynn, 2013). Since the mindset of the consumer predicts that given the large variety of goods, the consumer should be able to fully fulfill its own preferences.

In light of this, the researchers have decided to test whether a Filipino consumer also behaves this way. The researchers thought that it is a significant topic to discuss because given the fact that more products continuously go into the market. This could possibly tell more about how the consumers behave in the Philippines. Hence, helping incoming and incumbent firms in the market.

CHAPTER 3: Data Gathering

CHAPTER 4: Methodology Due to the binary nature of the independent variable in our equations, the Qualitative Response Model or simply QRM is the model of choice. Under QRM, there are several submodels such as Probit, Logit and Linear Probabilty model. The Linear Probability Model uses the OLS method to estimate the coefficients of the regression equation while both the Probit and Logit Models use the Maximum likelihood Estimation method to estimate the coefficients of the regression equation. However, since Y is dichotomous, it violates numerous critical assumptions of the OLS method. First, OLS assumes that the error term is normally distributed, but due to the binary nature of the Y, the error term is also binary hence its not normally distributed and fails to meet this assumption. Next, OLS assumes that the error term is homoscedastic. In this case, since the probability changes from one observation to another, the variance of the error term is not constant as well. Thus, yet another assumption is violated. Lastly, and most importantly, OLS very strictly assumes that the relationship between the dependent variable and the independent variable is linear. However, with the dependent variable being qualitative, and not quantitative like in the usual cases, the relationship between the variables is not linear. Thus the problem of unboundedness, where there are probabilities greater than 100% and less than 0%, will arise. Thus, making the OLS, yet again, not an optimal method. With that being said, we will use the logit model in our paper. After running the regression and doing all the necessary tests, the results will be analyzed. Through this analysis, a profile of the potential buyers from both environments will be formed. Consequently, using both the results from the regression and the profiles that we have just built, policy recommendations will be done in order to further improve the sellability of the items in the store.

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