Planning & Investing From jam to retirement: Why more choice can be debilitating

It all started with jam.

One day, shoppers at an upscale food market saw a display table with two dozen varieties of gourmet jam. On another day, shoppers saw a similar table — except only six varieties were on display. Behind the scenes, Ivy League researchers watched.

It came as no surprise to see more customers flock to the larger display, gravitating to the intriguing smorgasbord of options and flavors. What shocked the researchers, and the academic world since, was that when the time came for people to actually buy, those who saw the smaller display were 10 times more likely to purchase jam than those who saw the larger one.

The outcome of the experiment, conducted in 2000 by professors Sheena Iyengar of Columbia University and Mark Lepper of Stanford University, flew in the face of prevailing conventional wisdom that more options lead to more engagement. The results of their research, “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?”, were as clear as they were surprising: More choice isn’t always better.

People are “burdened by the responsibility of distinguishing good from bad decisions,” Iyengar and Lepper noted in their study. “Having unlimited options, then, can lead people to be more dissatisfied with the choices they make.”

Too much choice can lead to dissatisfaction

Traditional economic theory assumes people are rational consumers, making logical choices. Psychologists have held up the idea of choice over the years as a good thing that gives customers a sense of personal control. But behavioral economics has exposed a kink in those arguments.

With so many options to choose from, people find it difficult to choose at all. And when they do choose, they may feel overwhelmed and less satisfied with their selection. Social scientists and economists have dubbed this the “paradox of choice.”

At a time when the proliferation of choice has given consumers more financial options — from selecting investments in a 401(k) to choosing a long-term insurance policy or annuity — these findings have huge implications for investors and financial service professionals.

“If too much choice is reducing the number of people who take part in the retirement plan, or some other financial service that they can benefit from, then everyone has a problem,” said John Doyle, senior retirement strategist at Capital Group. “You can’t reap any benefit if the amount of choice you have is keeping you from participating at all.”

How to put it into practice

The main challenge is convincing consumers that having fewer options can in fact be better for them. But it is possible.

Companies such as Apple and Google credit much of their success to this concept. They say getting rid of clutter and focusing on simpler interfaces, fewer options and features helps customers get what they really want. For the financial services industry, that can mean carefully designed options and fewer, easier-to-understand menu choices to encourage better decision-making.

For example, it may make sense to relabel investing options by dividing a retirement plan menu into investment objectives that reflect the participants’ years to retirement, or investment options organized around life stages. When organized this way, concerns about risk preference and volatility become more palatable.

But key to this approach is first knowing what options are right for a client, Doyle says. For instance, a target date fund takes a complex investment challenge and presents it in a simple solution that plan participants can more easily understand. It allows all investors regardless of their level of sophistication to have a diversified investment that’s appropriate for their age and career timeline.

“If you are going to convince a client that it’s OK to limit choice, you have to be able to demonstrate that you can deliver,” he said.

The bottom line: If financial professionals can find the right balance between choice and simplicity, then they may find the recipe for success. It worked for jam.

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