Financially Speaking Blog

Too Many Choices

Published on November 9, 2012

I buy my groceries at Kroger.  Often times I drive directly in front of the store on the way home from work.  So it’s not unusual to get a message from my wife asking me to pick something up on the way home. 
Sometime back she asked me to pick up milk and cereal.  No problem.  The decision of which milk to buy is pretty simple:  no-fat, low-fat or the bad stuff.  I peer up to find the sign leading to the cereal aisle and make a right turn.  Problem.  From the floor to the top shelf; both sides of the aisle are seemingly hundreds of different boxes of cereal!  Why do humans need so many choices of grains and shapes and sugar and additives and colors?  By the time I get down the aisle I am overwhelmed, and whip out my cell phone to get help making the right decision about cereal.
Behavioral economists have been studying this phenomenon for some time.  As our world gets more complex with more choices, we become overwhelmed and sometimes fail to make a decision.  In his book, “The Paradox of Choice:  Why More Is Less,” Schwartz states “Whether we're buying a pair of jeans, ordering a cup of coffee, selecting a long-distance carrier, applying to college, choosing a doctor, or setting up a 401(k), everyday decisions -- both big and small -- have become increasingly complex due to the overwhelming abundance of choice with which we are presented.”
Three Lego blocks have 109 million different combinations.  A deck of 52 playing cards has 1,068 combinations. There are over 26,830 mutual funds, over 17,000 stocks and 529 education plans with 4,444 different portfolios. 
What are the possible investment combinations for your rollover IRA when you retire?  How do grandparents make the right decisions for their grandchild’s college education?  How do you pick the right combination for your 401(k) plan?
It may be okay to be overwhelmed when buying a box of cereal, but can be disastrous when making financial decisions.  Some people don’t understand the importance of paying for informed objective financial advice.  Some people do.

 

Tags: investment decisions; hiring financial advisors; behavioral economics

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