Investors’ Behavioral Biases: Part VII – Choice Paralysis
It has been a widely accepted “truism” that more choice is better than less. While that may have been true when two or three choices were preferable to one, today we are swamped with choice. This leads to decision paralysis. Evaluating and comparing all the choices is exhausting and stressful, often resulting in a lack of any decision at all. Then when a decision is made, stress comes from worrying whether it is the right choice.
In fact, several experiments have shown that most people prefer less rather than more choice. In the UK Tesco CEO Dave Lewis has reduced the number of products on Tesco shelves from 90,000 to 60,000. The intention is to improve the shopping experience. It is in part a response to the growing market share of Aldi and Lidl, which only offer about 2,000 to 3,000 products. For example, Aldi offers one choice of tomato ketchup, whereas Tesco had offered 28 choices.
Barry Schwartz in “The Paradox of Choice” (full details below), describes how people responded to too much choice of pension plans. The more choice, the less people took up a plan. And this was in the US where employers would match the employee’s contributions. When confronted with 100 or more choices people became paralysed with indecision. This not surprising, as it would not be possible for most people to understand the differences between so many plans, which leads to fear of making a bad choice.
In the investment space an example of Choice Paralysis could be selecting a single gold producer for your portfolio. There is a huge range of choice in terms of production, market capitalization, risk and other factors. To identify the appropriate stock would take a vast amount of comparative research and still leave substantial uncertainty.
One way to avoid this potential paralysis is to narrow the field. For example; place a limit on size of annual production or country risk to reduce choice.
The Paradox of Choice: Why More is Less
Harper Perennial, 2005
Buy it here.
Links to the first posts of the series