When investing – or buying jam – too much choice can be a bad thing

The investment world, much like the consumer world, contains a bewildering array of choices. We grew up believing that more choice is a good thing, but studies have shown this is not necessarily the case. Sheena Iyengar, a Columbia University professor of business and author of the book The Art of Choosing, shows how a large number of choices may even leave us worse off.

Iyengar pioneered the famous jam test, where one group of customers in a supermarket was offered a small variety of flavours of jam to try, while another group was offered a large variety (customers who
tried the jams were given vouchers to redeem on purchases of jam). Those customers offered a smaller variety were more likely to make a purchase than those faced with a larger variety. The greater the variety, the more anxious the customers became about making the wrong choice. Often they opted out of making any choice at all.

 

Subsequent studies have shown similar results for investments and medical insurance. Faced with too much choice, people put off their decisions for a long time, or even allowed the options to lapse. Even those who do make a choice, often end up making the wrong ones. A study of choices made by investors in 401 (k) retirement saving plans in the US showed that, over time, investors often chose money-market or bond funds over equity funds, even over long-term horizons, despite equities generally outperforming other asset classes over such periods.
Iyengar's studies have encouraged companies to trim down the number of products they offer. Procter & Gamble reduced the number of Head & Shoulders shampoo varieties from 26 to 15, and sales rose 10% as a result. Many investment firms have also consolidated their offerings to make life simpler for investors and encourage investment.

But life and business are not quite that simple. As a species, we seem to value more choice (one hypothesis is that the ancient hunter-gatherers evolved that way to seek out more varieties of food and develop a more balanced diet). Providers of those choices seem happy to oblige us with still more.
It seems too much to ask to expect providers to limit choices in every field (Iyengar says we seem comfortable with a variety of choices of about seven – any more and our anxieties and poor decision-making kicks in). Moreover, striving too hard to limit choice may deprive us over time of better products. What if the extra choices really are better for us than the old ones? And in some areas we do benefit from extra choice – imagine a bookshop that only stocked seven titles (more on this below).

 

If we can’t limit the number of choices, what can we do? The trite answer is to become better at making choices, but that is easier said than done. While we can always become more skilled in a particular field and thus better at deciding between the available options, we cannot be experts in every field. A wine fundi will have no trouble discerning between chardonnays or chenins in a supermarket. The fundi may even enjoy a bigger selection. However, not everyone can be a wine expert, a gadget-loving geek or an investment specialist. Some areas require years of diligent study instead of just an interest in the field.

Another possible answer is to categorise the available options. In the bookshop example, break it down into genres to ease decision-making. Pick a genre (crime fiction, biography, business etc), then break it down from there (Swedish detective novels, Second World War generals, entrepreneurship and so on). This works best where there are discernible differences between the options on offer.
Where neither of these approaches is viable, one should probably entrust one's decision-making to a professional. This is probably the advice one would give to anyone wishing to invest in the market (provided the professional has an impeccable record and aligns his or her interests with yours). Even here, the individual should not leave everything to the adviser. Those who engage in the decision-making process, who are not shy to ask lots of questions and get to grips with exactly what it is they want, stand a better chance of getting the most out of the provider, whether it be a plumber, interior decorator or investment manager.
Here's to making excellent choices. 

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