More choice is a sign of greater prosperity, right? That tall skinny soya cappuccino extra hot (without chocolate on top) was just what you wanted, wasn’t it? It might not be. It turns out that the more choice you give people, the less satisfied they will be. It used to be the case that if you didn’t like the coffee from the shop it was the shop’s fault for only selling an instant brand. Now, it is your fault for choosing a skinny milk when full fat milk gives the longer lasting foam. The blame shifts to you because you were given so much choice and you made the wrong one. This is the one of the ideas in the book “The Paradox of Choice: Why More Is Less” by Barry Schwartz.
And the relevance to investment? More choices also paralyse decision making. A study found that the participation rate of a pension plan fell 10% when the number of funds on offer went from 5 to 50. You think that you are going to make the wrong choice, as the one you choose probably won’t be the best performer. Even though this will probably be outweighed by the fact that the employer will match your contribution, people avoid the choice.
I watched Prof Schwartz on iTunes as part of the Ted Conference series. This is a series of short presentations by interesting people. You can also watch them online (click here for Prof Schwartz’s presentation) or download to your ipod. Other presenters include Freakonomics author Steven Levitt and Tipping Point author Malcolm Gladwell.