How To Best Handle the Choice Overload Phenomena

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 firsthand. 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 60s. 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 2022, there were more than 7,000 mutual funds and more than 3,000 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 that Modera 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.