Have you ever been in a situation where you made a choice without fully investigating all your options even though you knew that doing more research could have led to a better decision? For example, say you are interested in buying a wrist watch for everyday use. You go to the nearest shopping mall and after looking at a few models, you pick one that seems to offer a reasonable combination of price and quality. You knew that if you had researched more options you could have found a slightly better value, but you chose not to do so. In a sense, you knowingly went for a potentially suboptimal option. Was your decision irrational? Not necessarily. You might have exhibited a behaviour pattern popularly known as rational ignorance.
Acquisition of additional information is not a cost-free exercise. It takes time and effort to collect, process and utilize information.
The theory of rational ignorance dictates that for a person to justifiably expend that time and effort in collecting additional information, the value of that information has to outweigh the costs of collecting it.
In other words, if the information acquisition costs are greater than the value of the information collected, then ignorance is actually a rational choice. In such situations, a decision based on the flip of a coin can have a higher expected utility than one based on detailed, rational analysis of all the pros and cons of available options.
Take an example of a well-paid, busy executive whose job-related travel keeps her away from her family for extended periods of time. The value of the time that she gets to spend with her family is extremely high. It does not make sense for her to waste her time weaving through traffic trying to do comparison shopping to find stores with the lowest possible prices for the things she wants to buy. Even though she knows she can save some money by doing so, it would be perfectly rational for her to pay the higher prices at her neighbourhood mall.
The same logic works for corporate decisions. It does not make economic sense to convene a meeting of five highly paid executives to decide between options that are largely similar to each other. The cost of making a suboptimal choice is less than the opportunity cost of those executives’ time.
So, how do people make decisions when they find themselves in situations where they know that the cost of acquiring full information is more than the value of the acquired information? They generally tend to use heuristics or other simplifying mechanisms to choose among options. For example, voters typically feel that learning more about political candidates is not worth their time because of the large number of voters that collectively decide the outcome of an election. In such situations, the busiest voters use party affiliations of candidates as surrogates for where the candidates stand on a number of issues.
Companies use the same principle when marketing their products. The reason companies spend so much money on building their brands is to encourage buyers to use brands as surrogates for detailed information about their offerings. People stick with their preferred brands because they may feel that the differences among brands may not be enough to justify the effort expended in learning about those differences.
The next time you order a market research study or call a meeting to decide on an issue, consider the cost of doing so and the value and importance of the outcome. If the difference in the value of outcomes is not significant, you may be better off not spending your time and money on collecting information on the available alternatives.
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Praveen Aggarwal is an associate professor of marketing at the Labovitz School of Business & Economics at the University of Minnesota Duluth and Rajiv Vaidyanathan is a professor of marketing and director of MBA programmes at the University of Minnesota Duluth.