Barry Schwartz, author of “The paradox of choice – why less is more,” argues that
increasing the number of choices available increases the difficulty in choosing.
IS MORE BETTER? A look at why more may not necessarily be better… in life and investment choice.
It is a common belief that more is always better. Surely, more choice means that you have a higher chance of getting exactly what you want, which means you’ll be happier with your choice. But is this really the case? Barry Schwartz, author of “The paradox of choice – why less is more,” argues that increasing the number of choices available increases the difficulty in choosing an option. Additional choices mean that we have a higher expectation that we will be able to find exactly what we want. This can often lead to decision paralysis, where we become unable to make a decision, for fear that we’ll make the wrong decision. This can result in anxiety, stress, dissatisfaction and, according to Schwartz, even clinical depression. Increasing the number of choices available beyond a certain threshold can actually decrease happiness.
Why too much choice can make you miserable Regret and Anticipated Regret If we select an option that we are not entirely satisfied with, it’s easy to imagine that we could have made a different, better choice. The imagined alternative leads you to regret the decision made. This regret lessens the satisfaction you receive from your choice, even if it was a good choice.
Self-blame
Opportunity Cost
Escalation of Expectations
With limited choice, if we don’t like what we chose then we can simply blame the world for not making the perfect choice available. When the number of choices increases, we expect the perfect choice to exist. If we make a choice that is not perfect, then we end up blaming ourselves for not choosing better.
The value of something is dependent on what we compare it to. When there are a lot of alternatives to consider it becomes easier to imagine all the nice things about the alternatives you didn’t choose. This makes our choice seem less attractive and less valuable.
When choices are increased, the expectation of being able to find the perfect choice increases. So anything less than perfect will make us unhappy.
Too many choices in investing! Less is more in investments too. Schwartz studied how US employees chose to invest in voluntary retirement plans. He compared over a million employees and found that, for every ten fund options offered by the employer, the rate of participation decreased by 2%. An increased number of funds available meant that a fund had a higher opportunity cost. There was a higher chance of not being able to choose the perfect option. In fact, the increased complexity of the bigger fund choice resulted in many employees delaying this decision. The only problem was that the decision was seldom revisited. This meant that people were forfeiting a significant amount of free “matching money” from their employers. According to ASISA, there are currently 988 South African unit trust funds available. By asking someone who knows nothing about investments to suddenly think about asset allocation - to choose between property or bonds, and value or growth - we are adding to the complexity of choosing a fund. And we may also be making them unhappy. Stephen J. Dubner, author of Freakonomics sums it up. He says, “It seems wise to streamline choices whose complexity might otherwise hamper a good outcome.” Investments are complex enough without the added anxiety and pressure of choosing the wrong one out of 988. Unhappier investors are more likely to make irrational decisions - like switching funds when markets have fallen – because they are comparing the value of their choice to 987 alternatives. Investments are complex enough without the added anxiety and pressure of choosing the wrong one out of 988. Unhappier investors are more likely to make irrational decisions - like switching funds when markets have fallen – because they are comparing the value of their choice to 987 alternatives.
The Bottom Line These days, investors have more options than ever before. While in some aspects, this may be a good thing, in many, it isn’t. Our own experience suggests that even with hundreds of funds to choose from, planners typically advise clients to invest in a small subset of better-known funds. Old Mutual Wealth’s selection of solutions, strategies and investment funds has thus deliberately been kept simple, without sacrificing the ability to meet the needs of our clients.
“NOTHING IS SO EXHAUSTING AS INDECISION, AND NOTHING IS SO FUTILE.” – BERTRAND RUSSELL
Old Mutual Wealth is an elite service offering brought to you by Old Mutual Investment Services (Pty) Ltd and Old Mutual Life Assurance Company (South Africa) Ltd, Licensed Financial Services Providers
THE JAM STUDY Psychologists Mark Lepper and Sheener Iyengar offered customers a sample of 24 exotic, jams along with a discount coupon. Some customers were offered an option to sample a selection of six varieties of jam. Other customers were given the option to sample all 24 varieties of the jam. 30% of people exposed to the small array of jams bought a jar. Only 3% of those exposed to the large array of jams bought a jar. The larger choice discouraged customers because it forced an increase in the effort that goes into making a decision.
