When Sheena Iyengar was a doctoral student at Stanford, she conducted a now-famous experiment in which her research assistants went into a supermarket, put out different flavors of jam on tables and offered samples to shoppers. One table had six different jams and the other had 24.
Several shoppers who stopped at the table with the smaller sampling ended up buying a jar of jam, while only a few who visited the table with the larger selection made a purchase. The startling conclusion: Having more choices made the decision to buy harder, not easier.
Now a professor at Columbia Business School and director of its Global Leadership Program, Dr. Iyengar wrote in her 2010 book, “The Art of Choosing,” that seven seems to be the maximum number of options that permit good decision-making.
Sifting through choices is a growing challenge, not just for supermarket shoppers but for financial advisors charged with recommending the best of more than 7,000 mutual funds and 1,200 ETFs. Does having more choice really make us better off? Can we improve the process of choosing? What lies ahead as we’re faced with more, not fewer, decisions?
For insight we turned to three experts: Dr. Dan Ariely, professor of psychology and behavioral economics at Duke University and author of “Predictably Irrational: The Hidden Forces That Shape Our Decisions”; Thomas Frey, executive director and senior futurist at The DaVinci Institute and author of “Communicating with the Future: How Re-engineering Intentions Will Alter the Master Code of Our Future,” and Iyengar herself.
More Choices: Good or Bad?
Thanks to the information revolution and the Internet in particular, it’s now possible for every one of us to have more choices 24 hours a day. Does this help or hinder decision-making?
All three experts agree that too many undifferentiated choices can be disabling. “It depends on if you know what you want,” Iyengar told us. “If you know a lot about the domain in which you’re choosing, it’s fine. It might even help you. If you don’t know about that domain or what you want, then it’s going to cause you difficulty.”
“Choice is generally a good thing, but too many choices make us become paralyzed with indecision,” Thomas Frey pointed out. “I think there’s a limit that we’re butting up against about how many decisions we can make in a day.”
That’s precisely the case, as Dan Ariely confirmed in an interesting and disturbing remark: “There’s something called depletion; when people are facing [too many] decisions, their ability to make decisions and to resist temptation actually drops.”
He explained that our ability to resist temptation is like a muscle. “Basic research suggests that you resist temptation once, and then you resist it again, and your muscle fires but it gets tired. So your ability to resist temptation later on gets weaker.”
As a recovering overspender and a chocoholic, we both knew exactly what he was talking about. “This is common in daily life,” Ariely said. “You’ve resisted donuts, then Facebook, then saying something nasty to your boss; and then, very quickly, you are depleted and unable to make decisions in a good, reasonable way.” This probably explains why clients who are pressed to make important decisions too close together may either vacillate or make choices that are not in their own long-term best interest.
Is Less More?
So should advisors try to protect clients from having to deal with today’s myriad of options? Would we be happier if we had fewer choices?
“Most people have the experience of sometimes being happy with a lot of choice and sometimes being miserable,” Iyengar observed. Generally, she believes people with fewer choices are happier. “But the key to their happiness isn’t just that they have fewer choices,” she emphasized. “It’s that they feel they have the most meaningful choices.”
She provided an example. “Let’s say I give you six chocolates. You know that there are 100 available, but you’ll be happy with the six as long as you feel they are a meaningful six. If you think they were just randomly thrown in there, you’re not going to be happy about that.”
In other words, the six chocolates need to be meaningful for our personal needs and preferences.
Frey framed the question of too much choice differently. “Does being smarter, more informed and more intelligent make us happier?” he asked. “We tend to feel more in control, but that doesn’t make us happier.”
Is it true, then, that ignorance is bliss? “But as an investor, you need to be informed to make money,” he countered.
Avoiding the Wrong Choice
The more numerous our choices, the more it complicates the decision-making process. Frey sees this as a side effect of 21st-century progress. “When societies get more and more sophisticated, I think it is easier to choose badly,” he said. “We’re getting blindsided by choices we never realized we had in the past.”
Ariely agreed. “When people have more choices, they’re likely to be tempted to a higher degree,” he said. “So if there are more choices and more temptation, then they might make more mistakes.”
He sees the central issue not as the number of choices, but the complexity of choosing. “The things that help are things that limit this complexity,” he observed. “One example is rules. If you have strict rules, maybe even religious rules, now you’re not thinking about each decision. You have rules about what to do.”
Some of the most effective personal finance programs rely on this quirk in human behavior: dollar cost averaging, 401(k) deductions, Christmas Club. By contrast, when we try to decide every month how much to put into savings, we flub it.
If advisors can educate and persuade clients to follow specific steps to improve their financial well-being (whether you call them rules or policies or whatever), it will do them a tremendous service. Anything you establish as a standard becomes something that a client doesn’t have to make a decision about.
How Do We Choose?
Remembering from Iyengar’s “The Art of Choosing” that decision-making suffers when people are offered more than seven options, we asked how we weigh multiple possibilities in order to make a choice.
“I don’t think choosing is about just winnowing out the bad choices,” Iyengar said. “That’s what we think it is, but it’s an act of creating. It’s about figuring out what’s going to be an improvement over your status quo.”
Ariely leaned more closely toward the desirability of a limited number of options. “When you have two choices, they have one set of differences between them,” he said. “If you have three choices, you have two sets of differences. If you have four choices, you have six differences. So as the choices become larger, the complexity grows much faster.”
This suggests that decision-making works in a similar way: We weigh two of the possible choices against each other, match the winner against a third choice, and so on until the two best choices are left head to head. Ariely agreed. “Binary choices are the simplest way to decide, so that’s what we strive to do. We run away from complexity.” (This is the pattern for our national elections, proving that good judgment at every choice point is critical.)
But how do we evaluate choices to pick the best one? Is it a matter of habit? Do we undertake a logical analysis of the pros and cons? Or are we driven by emotional motives?