Jonah Lehrer writes about choice, and the American (?) fascination for ever-burgeoning options in the marketplace: more choice isn’t always a good thing.
Of course, we now know that more choice isn’t a universal good. Because the brain is a bounded machine – it can only process so much information at any given moment – people actually find excessive choice repellent. When we’re given too many options and no way of distinguishing between them – the different varieties of floss all seem equivalent – we experience a tremor of anxiety, the mild panic of supermarket uncertainty.
Sheena Iyengar, a psychologist at Columbia University, has done some incredibly interesting work on this subject. Consider her research on 401(k) plans, which looked at employee participation in plans covered by Vanguard, one of the largest mutual fund companies in the country. Iyengar found that, as the number of 401(k) plans increased, people became less likely to opt in. When there were only four different funds to choose from, nearly 75 percent of employees decided to participate. However, when people had to navigate fifty-nine different 401(k) options, only 60 percent of people decided to save for their retirement. In other words, excessive choice was repellent.
As Iyengar notes, these non-choosers probably intended to enroll in a 401(k). They probably took the hefty brochure home with them and planned on doing the relevant research. But then life got in the way and, before long, they’d forgotten to learn about the difference between a growth fund and a conservative fund.
You can see this in other prosaic examples. Standing in front of a large row of bookshelves at the book store, dithering over which book to get. Or being at a restaurant, and either frustrated because the four entrees listed don’t float your boat, or because the twenty entrees, plus multiple a la carte sides and sauces, provide insufficient guidance, and “everything looks good.”
Iyengar then looked at the slight majority of people who participated in the 401(k) plans even when there were fifty-nine different alternatives. Perhaps they made better decisions? Perhaps they were more satisfied with their choice? Alas, that wasn’t the case. Iyengar found that, for every set of ten additional fund options, 2.87 percent more of the participants avoided stocks completely. (This despite the fact that most of the additional funds included stock investments.) Overall, the 401(k) participants in the large choice condition allocated 3.28 percent less of their contributions to stocks, choosing to invest in bonds and money markets instead.
Why is this an irrational choice? A 401(k) is a long-term investment. Given such an extended time frame, it almost always makes sense to include some stocks or mutual funds, since those investments have historically outperformed bonds and money markets by a large margin.
The lesson here is that, in many circumstances, giving people more options has rapidly diminishing returns. When we can’t figure out the difference between our 401(k) options, or we’re too worried about choosing the wrong floss, we end up choosing to not choose at all.
I know exactly what they mean. Our 401(k) setup at the office, via Vanguard, has probably 20-25 different choices. The meaning of them is not readily discernible from their names, and honestly I don’t have the time (and will not extract that much more value) in going through their detailed prospectus info.
The application here is with reform of the student loan system, where Lehrer quotes from Gail Collins.
“We don’t hear students clamoring for choice in lenders. If anything, students and families need simplicity to understand the process and know how to navigate it,” said Edie Irons, communications director for the Project on Student Debt, a nonprofit dedicated to making college more affordable.
Since the government-guaranteed loans are regulated by Congress, they have virtually identical terms. The main variation comes in customer service: who has the best Web site or staff. Most current and former students do not seem to find this as being all that big a deal. What they need to know is exactly how much it will cost to pay back the loan after graduation, information about which they tend to hear less than the Web-site-quality matter. Besides, the loans often come in pieces, cobbled together from an array of different programs. It would be hard for an accountant to figure out what it all meant, and 19-year-olds are not at the point in life that maximizes attention to detail.
Another place where this might come into play is in national health care reform. One of the options being looked at is a “national health insurance exchange,” where people unhappy with (assuming they have it) their workplace health coverage could shop for private alternatives, one of which would be a national public plan.
The problem being is, presented with potentially thousands of choices, will folks throw up their hands and just opt for the first one they see, or the public plan, or something that is less than optimal for their needs?
There is certainly a sweet spot between inadequate / sub-optimal choices, and a surfeit of choices that makes people give up on the process or choose sub-optimal choices. That sweet spot varies between individuals to a certain degree.
I run into this at my job all the time. In doing software recommendations, there are often potentially dozens of choices (including different internal development paths) for a given functional need. Not only does it take far too much time to provide a detailed evaluation of all of them, but management’s eyes will seriously glaze over if I do so.
On the other hand, if I just evaluate the top market contender, or the solution that the client pre-chooses for me (“Hey, I heard about this from a friend / read about it in a flight magazine / got sent a glossy brochure / sat on a panel at a conference … we should use this”), I’m not doing my job. Either my client will be suspicious of me (“Why are you just giving me one or two solutions?”) or my boss will be (“Have you really looked at the alternatives?”).
One way I deal with this is to provide a couple of levels in presentations. I really like to give 3-4 alternatives — 3 is ideal, but 4 works okay, and someone usually comes up with a brilliant last-minute request to also evaluate #4, so might as well do that — and give detailed analysis of those. For the other five or six readily discernable choices, have a slide or a section that mentions them and why they were not selected for deeper analysis. Decide based on the audience whether to explicitly pass that info on, or just keep it in the back pocket in case the question is asked.
In the case of the 401(k), I think the best choice for companies offering multiple funds is to do what some software does: provide a good array of basic choices (5-7, max) for folks to pick and choose from in-between. Some of those might be pre-mixes — “Retiring in 10 Years” blended accounts, for example. Others would provide some solid, clearly directed options (hi-cap stock, low-cap stock, bonds, money markets).
Then have an “Advanced Options / Selections” button. For those folks who want to really do their research and min-max their portfolio, give them the other 15-20 funds supported. You’ll satisfy those people but not overload the folks who simply want a decent investment and don’t want to be day traders about it.
Offering people choices is, in principle, better than not. But offering them choices poorly is not doing them any great service. Something that all providers should remember.
(via Les)