Variety isn't the spice of life thanks to the diversification bias

18 March 2013

Nick Chater

Ever wondered why your cupboards are full of tins and packets of food you never eat or need? It is because we suffer from diversification bias.

Professor Daniel Read, of Warwick Business School, revealed on BBC Radio Four’s The Human Zoo with Professor Nick Chater, that humans really do think variety is the spice of life, yet when it comes to consuming, it isn’t.

“People tend to choose more variety than they actually want to consume,” said the Professor of Behavioural Science. “We believe that variety is a pretty good thing. But the reality is that when we are actually consuming things we tend to like less variety than we think or imagine that we will like.”

Hence the weekly trip to the supermarket just means more stuff left filling up cupboards in the kitchen.

Professor Read added: “Let’s say you buy half a kilo of cheddar, 100g of brie and another cheese that takes your fancy. Then you put them in your fridge; have a cheddar cheese sandwich and another and another until suddenly there is no cheddar left. There are all these other cheeses in the fridge, but you go back to supermarket to buy more cheddar cheese and then you will buy some other cheeses which will probably end up in the bin in the future.

“We have an image of ourselves which is different from the reality we are consuming, for all types of things. It is the same with books. We may think we are somebody who likes reading mystery novels, but also the occasional highbrow literary novel. In a two for three offer we buy two mysteries and one literary novel, read the mysteries and the literary novel sits on the shelf.”

And Professor Read, whose research looks into judgement, decision-making and choice under uncertainty and risk, says the diversification bias exists in business with investment managers also displaying it.

“Surprisingly this happens in investments,” said Professor Read, who has consulted for the UK Government and the Financial Services Authority on many aspects of behavioural economics. “If private investors have a number of investment possibilities they tend to spread their investments but not in the way a finance professor would say you should do, quite often it is simply that they want to have a different number of things in their portfolio. It is once again the diversification bias.”Investors involved in a bidding process are also afflicted by the ‘winner’s curse’ and it is something they should be aware of according to Professor Nick Chater.

On The Human Zoo Professor Chater asked students at Warwick Business School to bid for a jar of money. The highest bid was £9, but the jar only had £6.13 in it.

“If I get lots of people to estimate something they will have a wide range of bids,” said Professor Chater. “They will spread either side of the truth, some people estimate too low and some people too large. That means that the true value will be less than the highest bid, so the winner is almost certain to pay too much. This phenomenon is known as the 'Winner’s Curse’ and is a serious danger for businesses, for example, in bidding for mining rights, oil fields and mobile phone spectrums.”

Professor Daniel Read teaches Behavioural Sciences for the Manager on the Warwick Executive MBA, Behavioural Microeconomics on MSc Business and Strategic Games on the undergraduate courses.

Professor Nick Chater Principles of Cognition on MSc Business and Varieties of Decision Making on the undergraduate courses.



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