The over-diversification effect: Enhancement in perceived heterogeneity of multiple (vs. single)-others' preferences

Abstract

Consumers often make decisions for multiple-others when they do not know each one's true preferences. Under such circumstances, we demonstrate perceptions of enhanced preference heterogeneity for multiple-others, relative to the perceived preference of single-others. As a result, choices for multiple-others are more diversified than those for single-others. We attribute this effect to the perceived uniqueness of others in the multiple-other setting. Notably, when others are perceived as particularly unique, the inclination toward over-diversification intensifies. However, this diversification often leads to choices that do not align with the true preferences of the individuals, causing potential mismatches in demand and supply. We conclude with a discussion on the implications of these findings for managers and suggest avenues for future research.