Choice Paralysis

Too many choices might lead to decision paralysis due to information overload.

A Chinese saying claims that "It is less important that one does not know anything about what one is choosing as long as one has a wide range of choices to select from." Presumably, comparison among choices will reveal the most desirable features that one might want to have. Most people would agree with this bit of folk wisdom implicitly assuming three to five different choices are better than one choice to select from.

But what happens when the number of choices exceeds some reasonable limit?

A classic 2000 supermarket study involving choice of exotic jams showed that although more shoppers were attracted by 24 varieties of jams in one stand, only 3% of them bought any of the jams displayed. On the other hand, 30% of the shoppers who stopped by the stand that offered only 6 varieties of jams bought some jams (Iyengar).

The same choice paralysis appears just as likely elsewhere. A recent study found that participation in 401(k) plan among employees dropped as the number of investable funds offered increases. This aversion to extensive choices is particularly puzzling when employers match at least 50% of employees' contribution. People are literally throwing money away (Jiang et al).

Apparently, too many choices can lead to decision paralysis due to information overload. The need for more information to make a good decision is simply overwhelming. Additionally, subsequent studies found that people are actually less satisfied with the choices they make if selected from a larger number of options even when the extra choice effort leads to better results. There is lingering doubt that the choice is better than the foregone alternatives (Schwartz).

These findings have turned the conventional wisdom on rational economic choice upside down. Namely, the economic agent is not as assumed the all-powerful decision maker with unlimited power to process information who can rationally compare the whole universe of possible choices and optimize their choice using some kind of mathematical formula. Instead, he often avoids making any decision because he can't handle more than a limited number of choices.

In view of this choice paralysis, some employers have forced the decision of their employees with respect to 401(k) choice. When companies automatically enroll new hires but allow them to opt out, participation invariably goes up dramatically (Fortune).

References:
  • Fortune 3/21/2005. "Why Johnny Can't Save for Retirement."
  • Iyengar, S. S. "Choice and Its Discontent," Hermes Fall 1999." 5/21/1999.
  • Jiang, W. et al. "How Much Choice Is Too Much?: Contributions to 401(k) Retirement Plans," chapter in Pension Design and Structure: New Lessons from BehavioralFinance, edited by Olivia Mitchell and Stephen Utkus, Oxford University Press, 2004, pp 83-96.
  • Schwartz, B. "A Nation of Second Guesses." The New York Times. January 22, 2004.

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