Paradox of Choice and Utility Maximization: Music
Traditional Asset Pricing models are conceptually based on utility maximization. However, what about the role of the quantity of choices in utility maximization?
When studying utility maximization in finance, we typically look at an investor's efficiency/utility frontier. But what of the dynamic of choices? With financial instritutions offerring a wide host of investment solutions, the Paradox of Choice should certianly play a key role in the frontiers.
Paradox of Choice
Theory: The Paradox of Choice, a concept popularized by psychologist Barry Schwartz, suggests that while some degree of choice is necessary and beneficial, there comes a point where an excess of choices can lead to decreased utility.
Increased Complexity: More choices can increase the complexity of the decision-making process. This can lead to anxiety, stress, and indecision, which can reduce overall utility or satisfaction.
Regret and Opportunity Costs: With more options, individuals may experience regret or concern about missing out on unchosen alternatives. The awareness of opportunity costs can diminish the satisfaction derived from the chosen option.
Expectation of Perfection: A multitude of choices might lead individuals to expect a perfect decision. When this expectation is not met, it can result in lower satisfaction.
A simple illustration of the Paradox of Choice: Music Selection
A modern issue at hand is the selection of the right song for a particulair activity. with apps such as Spotify offerring over 20 million songs, one can quickly feel overwhelemed. Thus, resolving to currated playlists, appears to be a utility maximization route - essentially removing choices
Paradox of Choice in Music Selection
Overwhelming Options: With streaming services offering millions of songs, listeners are faced with an almost infinite array of choices. This abundance can make the decision-making process overwhelming.
Decision Fatigue: The effort required to sift through numerous options can lead to decision fatigue, where the listener becomes too tired to make a choice, or defaults to familiar options, thereby missing out on potentially enjoyable new music.
Regret and Second-Guessing: Even after choosing a song, listeners might experience regret or second-guess their choice, wondering if there might be a better song they haven't discovered yet. This can diminish the satisfaction derived from the chosen song.
High Expectations: With so many options, listeners might develop unrealistically high expectations for each song they choose. If a song doesn't immediately meet these expectations, they might skip it, perpetuating the cycle of searching without finding the "right" song.
...this leads to a decrease in utility
To further conceptualize and understand the paradox of choice to test utility, at least within the field of music, I developed a minmalistic music app. It simply allows one to replay a song or change the song - to a random song they have no control over! The app is very basic and uses music from Youtube. A preselected playlist was built into the app. The objective of the app is to simplify the musical experience by reducing choices and observing the effect on the users utility.
Try it out here. App was built for Android: