How to Best Handle the Choice Overload Phenomena

The jam study demonstrated the phenomena known as “choice overload problem” when humans are faced with choices, less is better.

Sheena Iyengar is known as the “world’s expert on choice.” A pioneer in the field of psychology, she has researched, written, studied and spoken about choice and decision-making for more than 20 years, and is the author of a piece of groundbreaking research now simply known as the “jam study.”

The jam study demonstrated the phenomena known as “choice overload problem” when humans are faced with choices, less is better. In this particular experiment, two sets of consumers were offered a selection of jams. One set was offered six flavors, the other set was offered 24. The set of consumers who were offered the 6 flavors were 10 times more likely to purchase a jar than consumers who faced a choice of 24 flavors. Ten times!

As my two-year-old says, “But why?”

When it comes to choices, the prefrontal cortex is the captain of our brain ship. When a few options are presented, our prefrontal cortex is happy and chugs along making decisions for us in our subconscious mind. However, at a certain level, the number of options can become overwhelming and our prefrontal cortex gets disrupted, flustered or will simply shut down, oftentimes leading to us to inaction or poor decision-making.

A few years ago I experienced this first hand.  Over the years I had accumulated an unnecessary volume of work pants. Slacks, trousers, khakis, chinos, cuffed, pleated, flat front; I had them all. It was great for workplace wardrobe variety but did not make for an efficient morning routine, and as any sleep-deprived parent of a newborn will tell you, efficiency is key. Needless to say, the overwhelming number of pants in my closet led to inaction, rushed decision-making, and some shirt/pant combos that led to regret by lunchtime.

What do my pants and jelly have to do with personal finance? 

Well, it just so happens that Dr. Iyengar has also authored some research on investment selection, specifically on 401k plan choices, and her team’s findings were strikingly similar to that of the jam study.  Her research demonstrated that the more investment options a 401(k) plan offered, the lower the participation rate. Plans with two funds to pick from had a participation rate of 75%, whereas participation rates for plans with more than 50 fund options hovered in the low 60’s. What’s more, in plans with a higher number of offerings, the participants were more likely to avoid making a decision and default into a low risk/low reward money market fund.

Moral of the story: Choices can be overwhelming. 

Choice overload can lead to poor decisions or inaction. This holds true for innocuous things, like picking a flavor of jelly at the store, and in life-altering things, like saving for retirement. As of 2020 there were more than 9,000 mutual funds and almost 2,000 exchange-traded funds that investors could choose from, according to The Investment Company Institute. That’s on top of the thousands of public companies traded daily on the NYSE and NASDAQ. Talk about a choice overload problem! (Data on the number of flavors of jam available to consumers is unavailable at this time, but I bet it’s a lot!) Here’s the good news, investing doesn’t have to be complex or stressful, especially when it comes to saving for retirement. One thing you can do is start by outlining your goals and objectives and create a plan to get there. It’s one of the first things that Parsec’s advisors do in any new relationship and is a central focus to our ongoing relationships with our clients. Your goals should be your priority; the investments are just the vehicle that help you get there.

About my pants

In case you were wondering, one morning after a particularly sleep-deprived night my prefrontal cortex had finally had enough with choice and I resolved to mimic Steve Jobs and just adopt a standard uniform of sorts. So, yes, these navy blue, slim-fit trousers do look strikingly similar to the pants I wore to work yesterday. They should. I also have 9 more that are exactly the same hanging in my closet at home, and my prefrontal cortex thanks me for that.

Judson Meinhart, CFP®, BFATM, MBA
Financial Advisor, Manager of Financial Planning

Share:

Recent Posts:

How To Evaluate Taking on “Fun” Debt

Personally, there is nothing more relaxing and exhilarating than being on a sailboat with a 15-knot wind on your beam (side), listening to the soft sounds of water splashing against the bow and using wind energy to propel the boat forward.

Tax-Loss Harvesting Amidst Market Turmoil

Market declines like the one we are currently experiencing present great opportunities to take advantage of cheaper asset prices. Almost everyone with a taxable account should be harvesting tax losses during times like these.

“What If” Contingency Planning

We want to ensure you are thriving, as living a healthy and successful life is truly priceless. Of all the steps that can be taken toward financial security and peace of mind, planning our own death and incapacity is the least popular. Life goals dominate our consciousness, and these goals are often about ourselves. Estate planning is not as much about us as it is about the people and things that we love.

Recent Quarterly Newsletters:

Thrive By Ensuring Your Loved Ones Are OK Edition

Our Q3 2022 newsletter focuses on how to thrive by ensuring your loved ones are OK. In it, we have created an eight-page fillable guide you can create for loved ones to follow after you pass. We also provide other guidance on estate planning, caring for aging parents and preparing for a potential disability.

Thrive by Learning and Growing Edition

Read our Q2 2022 newsletter on how to thrive by learning and growing. CEO Rick Manske reflects on graduation season and what this time of achievement and change means for students and loved ones. CIO Bill Hansen writes about education savings; President Harli Palme writes about tax savings related to college expenses; Portfolio Manager Nancy Blackman cautions about hidden costs of college. Advisor Charles Thompson outlines why it’s important that we value and prioritize travel. Advisors Judd Meinhart and Hilary Daniel write about job transitions and what to do with your 401(k) and new benefits. Advisor Neal Nolan ends with 10 ways to celebrate Independence Day and we highlight announcements across our firm. We hope you enjoy this edition!

Recent Whitepapers:

Stay Up To Date With Parsec

Sign up to join our mailing list and receive quarterly newsletters, whitepapers, news, and more right in your inbox.
Scroll to Top

Not a Client But want to receive updates?

Please sign up to join our mailing list and receive our latest news, thought leadership content and invitations to upcoming webinars.