Stay happy: satisfice!

Martin Evans: 14 July 2009 in Financial services

The Financial Services Authority has recently been consulting about consumer responsibility. How far does the duty of the seller extend? Shouldn't buyers still be expected to take proper advice, exercise due diligence and accept responsibility for the risks they take? The answers to those questions determine how interventionist our regulators should be.

The FSA's paper is realistic about the gap between people as rational economic agents and what people actually do. But it seems to miss the point that people may have different choices about how far they want to conform to the ideal of a rational chooser.

Some people are optimisers: they want to be sure that they've picked the best, that they've not 'missed out', that someone isn't doing better than them. Even if they're not willing to invest enough effort to deliver that, they feel they ought to - or that someone should be doing so on their behalf. But other people are satisficers. They know that they're not prepared to put in that much effort. In fact they know that even optimisers can't - that they're doomed to at least occasional dissatisfaction. So the satisficers ration the effort they put in, find something that's 'good enough' and accept that there's probably something better that they've missed. (For more on this theme see Barry Schwartz's book The Paradox of Choice.)

Most of us are nearer the optimiser end of the spectrum in some contexts than in others. Optimising has greater costs than satisficing: we need to put in more time and effort to acquire and interpret information, to explicitly order our priorities, and to find ways of translating that into a decision procedure. If we're choosing a car or a holiday, for example, there are psychological rewards associated with this effort: we can riffle through the catalogues and magazines, imagining future pleasures. There no such rewards for most of us in choosing a life insurance policy or a financial investment. If we are optimisers - and we all are to some degree, we're haunted by the fear that we'll be making the wrong decision.

Both optimisers and satisficers kid ourselves that we're making more rational decisions than we actually are. We're all using 'heuristics' - shortcuts of various kinds. But I'd question whether it's a reasonable aim of public policy to push us as far as we can towards the optimiser end of the spectrum. Particularly since it's easier to be happy as a satisficer than as an optimiser. Maybe the FSA should think more about heuristics to help the satisficer get not too bad a deal.