The diversification effect, a tendency toward greater variety as multiple choices are made simultaneously, in advance of consumption, is a robust and important phenomenon. Researchers have typically explained the diversification effect in terms of differences in the process by which people select items from among those available. This precludes the possibility that the locus of the effect lies in people's choice sets themselves—that is, how people decide which options to consider when making choices. The authors examine the effects of set formation using an experimental choice sequence task and conjoined stochastic model of set formation and conditional choice. The findings demonstrate that set formation plays a critical role in diversification: Previously chosen options are indeed discounted, but only for simultaneous choices and only in the set formation portion of the model. Furthermore, the expected number of choice set items is substantially greater in multiple- versus single- item choice. Specifically, when consumers choose simultaneously choice set sizes appear relatively larger overall, but the previously chosen item is less likely to be in a person's (latent) choice set. These findings cannot be attributed to alternative patterns of covariation, including latent error correlations; to temporal stochastic inflation; or to unobserved heterogeneity.
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