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Too much jam: the consequences of choice overload

In academic circles, the phrase ‘too much jam’ doesn’t refer to over-consumption of jam (though a useful reminder at this festive time of year) but rather a well-known behavioural experiment by the psychologists Sheena Iyengar and Mark Lepper. It refers to the problem of choice overload and it provides useful insights for the funds management industry.

The paper is titled “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?, and was published in the Journal of Personality and Social Psychology in 2000. It has been cited in over 1500 subsequent pieces of research. The paper contains three choice experiments.

In the first experiment, shoppers at an upmarket supermarket encountered a tasting booth that displayed either a limited range (just six) or an extensive selection (varieties) of different flavours of jam. This type of research is known as a field experiment and research assistants dressed up as shop employees ran the jam-tasting booths so that outcomes could be carefully observed.

In the second experiment students in an introductory social psychology class were given the opportunity to write an extra-credit (ie not compulsory) two-page essay. Students were given either six or 30 potential essay topics on which they could choose to write.

The third experiment involved tasting chocolate (where do I volunteer?!). Participants were presented with either a limited or extensive range of chocolates from which to make an initial choice. After this some people were given the chocolate of their choice to taste while others had a chocolate chosen for them.

So what results came out of these experiments? In the first (jam booth) experiment:

  • consumers appeared to be more attracted to a tasting booth that offered significant choice, with 60% of customers stopping at the booth with the extensive selection
  • however, significantly more shoppers purchased a jar of jam when presented with only the limited selection compared with an extensive range (30% versus 3%).

In the second (extra-credit essay) experiment:

  • students showed greater participation when offered limited choice (74% undertook the essay when offered limited topic choice versus 60% when offered extensive topic choice)
  • students offered limited choice attained higher grades than those offered a wider topic choice.

In the final (chocolate) experiment:

  • those offered an extensive range of chocolates found the choice decision more enjoyable than those offered a limited range, but they also found the decision-making process relatively more difficult and more frustrating
  • for those who tasted the chocolate they chose, subjects who chose from a limited range were more satisfied with their choice than their counterparts who chose from an extensive range.

So what do we take out of all this? Clearly the results highlight the issue of choice overload where too much choice can have adverse effects on outcomes. It also highlights the complexity of choice.

There are many examples of different industries which cleverly account for consumer behavioural choice issues. For instance, Aldi supermarkets only provide one or two choices in each product category, and many car companies have over recent years reduced the number and complexity of choices within their model range.

Choice and investment decisions

Is the funds management and superannuation industry similarly affected by these complex choice behavioural issues? Logic would suggest yes. Why wouldn’t investment decisions be affected by the size of the range of investment options? Making investment decisions is complex and too much choice may create similar experiences as in the chocolate experiment.

Indeed, in a subsequent Pension Research Council Working Paper by Iyengar, this time with Wei Jiang and Gur Huberman (entitled How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans), the authors explore whether extensive choice is a deterrent to participation in a pension plan. They find that participation in 401(k) retirement plans falls as the range of investment choices increases. Note that plan participation in the US is not compulsory, and so this result isn’t directly applicable in Australia, where we have the Superannuation Guarantee. However, it lends weight to the argument that choice overload can be a deterrent to making an active choice, and can lead to a difficult and frustrating investment decision-making.

Yet the concept of choice overload is challenged by the rapid growth of SMSFs (with no restriction on investment choice) and the increasing range of investment options offered by super funds.

While SMSFs offer huge flexibility, they do not compel members to make an active choice from a defined menu list. Some investors may run very simple investment strategies (high allocations to cash and domestic equities) while some SMSFs may be established with an investment strategy already pre-conceived. So an argument can be made that SMSFs actually provide the benefits of choice without the restriction of a limited choice menu or the stress of an extensive choice menu.

When it comes to menu choice, the retail funds have historically offered much more choice than industry, public sector and corporate funds, generally more than 200 choices for a retail fund versus around only 10 or less for a non-retail fund. So does this mean that retail funds encounter substantially higher level of choice overload problems than non-retail funds? Not necessarily – it most likely depends on the financial service model. Many retail super fund investors have probably been placed in these funds by a financial planner who is trained to make investment decisions; of course they may have their own technical, agency and behavioural issues. However they would most likely be better placed to handle larger investment choice menus than the fund member.

What will be interesting to watch are moves by industry funds to provide a greater range of choice to their members in an attempt to stop the flow of high balance members shifting their accumulation balance to an SMSF. It may be that many members choose to switch to this broader offering (a la the more extensive jam booth) but perhaps, if this extended range of investments is not complemented by advice, we may see choice overload issues come to the fore.

Choice overload is one of many complex issues associated with the study of how choices are made. It is a major (and realistically incorrect) assumption that rational financial decisions will always be made. We are soon to enter a major review of the Australian financial system and choice should be considered in far greater detail rather than simply taking an ideological view that more choice and more freedom is always better.


David Bell’s independent advisory business is St Davids Rd Advisory. David is working towards a PhD at University of NSW.



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