The brain caught in the jam jar - The harmful effects of too many choices
Whether you're strolling through the summer markets or - unfortunately already! - in the aisles dedicated to the new school year, you have probably been confronted with a difficult choice: red or purple swimsuit, large or small pencil case... In the light of our purchases this third quarter, let's discover an aspect of the indecision problem...
Richness of choice... thought paralysis!
Imagine yourself walking through the aisles of your supermarket next Saturday. At the corner of a gondola, you are offered to taste jams from a well-known brand, which you can then find on the shelves. The offer is all the more tempting as you can try as many flavours as you like and get a discount coupon when you buy! This is what happened to a sample of 754 people entering a California supermarket in 2000. Their experience is nourishing in more ways than one, since, without knowing it, they were observed for the purposes of a study(1)!
The small subtlety of the experiment lay in the number of jams offered for tasting: during a certain period of time, only 6 different jams were offered on the stand; the rest of the time, the choice was from a total of 24 flavours. Unsurprisingly, the wider choice attracted the attention of 60% of visitors, whereas only 40% of consumers stopped by the tasting stand when only 6 jams were on offer. But the discovery concerns the implied decision making: the act of purchase itself. 30% of the purchasers confronted with a choice limited to 6 jams proceeded to buy one or more jars ... whereas they were only 3% to do it in front of an abundant choice of 24 flavours! The explanations proposed are multiple: the consumers attracted by the narrower choic of 6 jams were more interested by the selection displayed, they considered the 6 flavours "special"...
If according to the French proverb "abundance of goods does not harm", the abundance of choice can be harmful by risking to lose some or the others. You will easily understand, that's why the big online retailers or the video on demand actors put forward the "trends of the moment", "top 10" or highlight the products that seem to correspond to your tastes.
Tightening the field of possibilities
From the supermarket to the management of personal finances, we will agree, there is more than one step! Nevertheless, if we make the transposition, it appears that a too large offer of financial products and services will tend to demotivate us to take action and will favour our inertia.
Too often, the overabundance of choices in the financial field leads us to favour decisions that are easy to implement: investing in assets with which we are familiar, replicating an asset allocation, etc. It also encourages us to make default selections, those that are self-imposed and often seem natural as an extension of what has already been done, thus minimising the effort required to think things through. Lastly, the excessive supply of proposals may encourage a scattering of investments, going well beyond wise diversification, without any real structural axis: for example, an excessive number of live securities in a sotck portfolio probably no longer makes it possible to properly monitor each investment.
To facilitate our decision making process, it may therefore be preferable to narrow the field of possibilities. Instead of considering the equity market as a whole, it is for example possible to compartmentalise it by sector or nationality. Instead of being stunned by the abundance of funds in which you can invest, you can narrow the field to those the underlyings of whoch interest you (geographical area, theme, ESG (Environment, Social, Governance), etc).
As our "Behavioural Finance" section is still young, you will not be confronted with an overabundance... this is the opportunity to (re)read our previous contributions!
(1) « When Choice is Demotivating: Can One Desire Too Much of a Good Thing?» by Sheena S. Iyengar and Mark R. Lepper, 2000
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