Do You Diversify?

Research shows that variety seeking isn’t always the best strategy.

Posted Mar 15, 2012

Most of us probably know the concept of diversification from the perspective of finance. Savvy investors usually don't put all their eggs into one basket. Diversification also occurs when we buy consumer goods. In that domain, however, diversification isn't always the most advantageous strategy. Have you ever opted for variety in purchasing a month's supply of breakfast cereal, only to later regret not having chosen more boxes of your favorite cereal?

Humans live in the moment. We are generally poor predictors of our future preferences and behavior. Perhaps not surprisingly, research has shown that people seek more variety when they choose multiple items for future consumption than when they make choices sequentially, i.e. on an "in the moment" basis. A choice of variety greater than an optimal ("as needed") level is known as the diversification bias.

When people diversify, virtues (e.g. healthy snacks) also tend to be chosen in greater proportion relative to vices (e.g. less healthy but tasty snacks). An interesting study on this phenomenon by Read, Loewenstein and Kalyanaraman (1999) randomly assigned experimental participants to two groups: advance (simultaneous) choice or sequential choice. In the experiment, all participants first had to pick three dates (separated by at least two days) in the future on which they wanted to watch movies (videos). 'Advance choice' individuals had to schedule all movies at the same time, one for viewing on that day, the other two for later evenings. 'Sequential choice' individuals also began by choosing the movie that they wanted to see on that day, but had to return on future days to choose their second and third flicks.

Diversification bias may be partly explained by the spacing of consumption. Recent experiments by Galak, Kruger and Loewenstein (2011) show just that. One study asked experimental participants to make a playlist of ten pieces of classical music. Some individuals were told that they would have to listen to the pieces back to back, while others were told that they would have a 2-minute delay (filled with a task unrelated to the study) between listening to the pieces. In addition, some participants had to create their playlists at the beginning of the experiment, while others had to choose sequentially, one piece at a time.  

The simple takeaway for savvy consumers: if you want to choose optimally, make your choices on an as-needed basis. If that's not practical, don't over-diversify if there are significant intervals between consumption. One of the remaining questions, then, is this: how do the laboratory findings on consumption spacing translate into real life? For example, how many hours, days or weeks make for a meaningful gap that would prevent the average consumer from growing tired of eating the same cereal? For individual consumers, only experience will tell.

Available from July 2014: The Behavioral Economics Guide 2014 on BehavioralEconomics.com (free download)

References

Galak, J., Kruger, J., & Loewenstein, G. (2011). Is variety the spice of life? It all depends on the rate of consumption. Judgment and Decision Making, 6, 230-238.

Read, D., Loewenstein, G., Kalyanaraman, S. (1999). Mixing virtue and vice: Combining the immediacy effect and the diversification heuristic. Journal of Behavioral Decision Making, 12, 257-273.

Read, D., & Loewenstein, G. (1995). Diversification bias: Explaining the discrepancy in variety seeking between combined and separated choices. Journal of Experimental Psychology: Applied, 1, 34-49.