The Paradox of Choice: Having Options Could be Negatively Impacting Your Finances

Having Options Could be Negatively Impacting Your Finances

Waking up each morning, we are faced with a day full of choices. What pants will you select when you have 15 pairs to choose from? Will you opt to bring coffee from home or stop for something on your way to work? What will you make for dinner? Something from items already in your pantry? Or will you have to select from the hundreds of items at the grocery store?

It’s a wonder we don’t find ourselves paralyzed every day from the sheer pressure of deciding.

Ironically, however, having the ability to choose is something most of us have come to expect. The power should be in our hands. But what if this power is simply placing unnecessary strain on already taxed brains?

Choice leads to inaction or poor decision-making

Taking the plunge and starting the very necessary financial task of saving for retirement is intimidating. Most of us know very little about investing in general, let alone how to create a plan that will cover us in the 20+ years after retiring.

According to a study discussed in PLANSPONSOR,

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“Too much choice is not always a good thing, at least for 401(k) investment options. Offering employees lots of investment choices in a 401(k) plan actually leads to lower participation, according to a study by Columbia University’s Sheena Iyenger in cooperation with The Vanguard Center for Retirement Research. The research finds that, on average, every additional 10 investment choices cuts participation rates by 2%.”

Iyenger believes the reason for the drop in participation stems from lack of information and overwhelm. Most people don’t know where to turn for help so instead they delay saving altogether. She also found that, even those who managed to pick funds, were more likely to make less than optimal choices, avoiding stocks and equity funds in favor of money market accounts.

Spending too much time on the outcome – and not enough

When I’m faced with a large purchase, or even one medium in size, I spend an exorbitant amount of time researching my options. I will scan consumer reviews, run price checks, look for any type of direct comparison between competitors…and then I’ll double check my previous research.

I want to make sure I am making the right decision.

While this research helps me to be an educated consumer, the time involved doesn’t always match the size of the purchase and the difference between the options is often so minor, I could have been fine going in any number of directions.

Studies also pinpoint people on the other end of this spectrum — those who will make snap judgments simply to avoid the hassle of sorting through a wide assortment of options.

“In a paper in press in the Journal of Consumer Research, [Alexander] Chernev found that when people were offered variants of the same brand of toothpaste – cavity-prevention, tartar-control and teeth-whitening types, for instance—they tended to switch to another brand that offered a single option.”

So what’s the solution?

“Satisficing” – a term coined by Nobel Laureate Herb Simon, PhD — could help solve the mechanisms for handling choice overload. The idea is to choose the first decent option that satisfies preferences and requirements. It’s about choosing the “good enough” option and moving forward without wallowing in regret.

Another solution is to eliminate options right off the bat. Say, for instance, you’re purchasing a pair of headphones and you know the top selling and best-rated brands are Sony and Bose. From the start, get rid of all choices from other brands. Going with the masses will likely lead you towards a quality pair of headphones that fits all your major criteria – without wasting all your time.

Also, according to experts, when you attempt to make choices could directly impact how good of a choice you make. It’s best to perform your most important decision-making tasks at the beginning of the day, or when you are fully rested. This eliminates or at least lowers the probability that we will make a snap decision based on one singular factor like price.

The double-edged sword of choice

In theory we may like the idea that every day we face a world full of options. We have the ability to change the look and feel of our lives at any given moment, simply by making a different choice.

But when it comes to our finances, an overabundance of choice might not be that great after all.

How does having too many choices impact your financial life and have you done anything to combat it?

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