What is... | May 10, 2013

What is choice overload?

Picking the meal you want from a menu of dishes is one of the joys of dining out. But what if the menu runs to dozens of pages? Choice can be a good thing but too much can make it more difficult to decide.


Studies suggest this pressure can apply in a wide range of situations – from small decisions such as what to eat through to much more significant choices around which mobile phone plan to buy or pension fund to have.
Too much choice might cause people to delay making important decisions or avoid making them altogether. It can bamboozle with so many options that we pick the wrong one under pressure.
Another result of this “tyranny of choice”, as it is sometimes known, is taking shortcuts, such as the default option that applies when we don’t make a choice. This path can be a good one if the default suits an individual’s needs but is not if it doesn’t.

I’m not sure about that 20th jam
Perhaps the most famous experiments on choice overload involved tastings of jam in a supermarket. This paper out of Columbia and Stanford universities in the United States in 2000, details an experiment in which shoppers were either given the choice of six types or 24 types of jam to taste. It found that of those faced with the smaller number of jams, 30% went on to buy compared with just 3% of the group who could choose from the larger selection. It is possible, wrote the authors, that the wider choice increased pressure and those shoppers felt they didn’t have enough time to determine their favourite.
In another experiment in the paper, participants were asked to try chocolates either from a wide selection, a small selection or no selection. The results showed those who were given less choice were more satisfied.
An eZonomics poll in 2010 found 43% of respondents found it hard to choose if they were had too many types of one product to pick from.
Nudge blogs that choice overload is evolving in the information age, giving the example of daily deal emails to which many thrifty shoppers subscribe. Being bombarded with many offers makes it difficult to decide how to respond.

Most of the time, I like to have a choice
Choice can increase competition between suppliers, make it easier to get what you want, improve quality and drive down prices.
An analysis of 50 published and unpublished experiments about choice overload raised questions as to if it was a problem and the authors wrote that the evidence suggested more choice is better in many circumstances.
The paper highlights that the number of options to choose from is only one of many factors that come into play when making a choice. A combination of additional factors – such as time pressure – might make choice overload more likely.

I’ll choose my fund next year...
One of the problems with too much choice is that people can put off choosing altogether. If the choice is for something important, such as a pension fund, rather than simply which jam to buy, the consequences can be big. A paper by the United Kingdom’s Financial Services Authority cites research that found pension plans offering the choice of more pension funds “had significantly lower participation rates”. Given that procrastination is one of the main problems associated with the way people manage money, it might be helpful to put steps in place to limit the inaction from too much choice.

I’ll have what you’re having
In addition to putting off making a decision, people use “short cuts” when faced with too much choice.
The Australia Institute gives the example of asking a friend in the office or family member which pension fund they have then choosing the same – even if friends or family are no better informed. But this can be a trap because individual circumstances matter. Parents will likely have a different tolerance to financial risk than their children (related to lifecycle investing) or work colleagues may have different retirement aspirations.

Shall we go with the default option?
Taking the “default” is another option when faced with too much choice. Intelligent defaults can be helpful (this 2012 paper tells of 50 percentage point jump in participation for new workers at a large employer that switched to an employee savings scheme that required workers to opt-out rather than having to choose to join).
But it becomes a problem if the default doesn’t suit us or isn’t in our best interests. The Australia Institute warns against assuming the default is a sensible compromise, saying it will not always yield the best financial outcome for each person.
So one strategy is to be wise to the tyranny of choice, make a decision when needed – and examine the default option closely if it all seems too hard.
Planning ahead to give enough time can also be key, as time pressure appears to add to the feeling of overload.

RetirementProcrastination

eZonomics team
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