The Paradox of Choice

If choice is a good thing, is more choice better?

Not necessarily. Researchers put consumers in front of a shelf of a hundred types of jam and a different group in front of a dozen types. Consistently, the consumers faced with a hundred different choices had a hard time deciding what to buy, compared with the folks that only had a dozen to choose from. Academics call this phenomenon “choice overload.”

We’ve seen choice overload apply to consumer products companies, like Smuckers or Gillette, where too many brands lead to lower sales. We’ve also seen it apply to 401(k) plans, where plans with a choice of two funds had much a better participation rate than plans with significantly more. On the other hand, if people already have a good idea of what they want to do, a surfeit of choice actually helps them decide. They can get exactly what they want. But for the average Joe, having too much variety is paralyzing.

When it comes to investing, it’s important to understand your own limitations. The internet and online brokerage businesses are happy to provide you with more information and choices than an average person can process in a year. But if you know ahead of time what you want, then this is a golden age: there are stocks and mutual funds and ETFs to fit every style, budget, and taste. And they’re competitive: a global portfolio of stocks and bonds can be constructed in a surprisingly economic manner.

Just don’t get discouraged just because there are so many alternatives. Because in financial planning, the worst choice to make is never to start.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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