Say a startup has to make this decision: Should it open in a large market where there are many customers, or focus on a smaller niche market? Students picking a focus of study face a similar choice when deciding between a major that leads to more job possibilities or a more specialized one that leads to fewer career options. These choices are essentially strategy games whose outcomes depend not only on what the primary player chooses to do but on what everyone else does as well. If a lot of new businesses open in the large market, they’ll ultimately split the customer base.
Research suggests that in these “pool-choice” games, it’s hard to win. People tend to pick the smaller, more niche option because they think a larger number of their rivals will pick the bigger one, according to research by Chicago Booth’s Christopher K. Hsee and Alex Imas, University of Toronto PhD student Ying Zeng, and Booth PhD student Xilin Li. As such, the smaller option winds up being split among more people, yielding the opposite result from what these players intended.
“People interacting strategically believe that they are more sophisticated and think more deeply than other players in the same situation, even though others are drawn from the same population, and are on average just as smart and sophisticated,” the researchers write.
The researchers set out to test whether more people would systematically choose the smaller option over the larger one, which they call an “undershooting bias.” The bias exists, the researchers argue, because the larger choice is the “apparently superior option”—and most people believe that others are less strategic than they are.
The researchers conducted 10 experiments to test the theory. First they asked 150 participants via Amazon Mechanical Turk to choose which of two accounts they’d like to enter to win a small sum of money. They told participants: “Each winner will get money from one of two accounts, one large and one small. The larger account contains $55, and the smaller account contains $45. Everyone must decide in advance which account to get money from if they win.” The subjects were told that 20 people would be picked randomly after making their choice and paid according to the decision.
Asked to choose between two pools of resources containing amounts or items that would be divided equally among participants, most chose the smaller pool with fewer resources, believing that many would pick the larger one.
Standard game theory makes a clear prediction in this setting: 55 percent of people should choose the larger account and 45 the smaller one. In contrast, only a third of the participants chose the larger account, far below the rational 55 percent benchmark. As a result, when the smaller pot was divvied up among the two-thirds who chose it, the allotted amount was only $3.46, rather than the $5 they would have made if there were no undershooting bias. The one-third of participants who picked the bigger pool got more than twice as much, $7.86.
Further experiments demonstrate the same phenomenon across different scenarios. Against the backdrop of the pandemic, the team asked college students whether they would seek out masks from a store with 2,001 in stock or at one with 1,999. With even such a tiny difference in pool size, more than two-thirds of the participants still chose the smaller pool.
When asked for the rationale behind their choices, respondents expressed that others simply weren’t as strategic. When some participants, prior to making their choice, were told that others are in fact just as smart, the undershooting bias disappeared and more than 60 percent of the participants chose the larger pool.
Bottom line: it may pay to remember that other people making the same decisions are probably just as savvy.
Christopher K. Hsee, Ying Zeng, Xilin Li, and Alex Imas. “Bounded Rationality in Strategic Decisions: Undershooting in a Resource Pool-Choice Dilemma,” Management Science, October 2021.
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