investing

More choice is always desirable. This maxim is widely accepted, both in the investment arena and in general.

Certainly more choice can’t be seen as having drawbacks – or can it?

In The Paradox of Choice1, Swarthmore College professor of social theory Barry Schwartz convincingly argues that the process of making constant decisions amidst a sea of overwhelming choice – be it health care options, televisions, or investment products – can and often does result in behavioral biases, stress, and poor decisions. He suggests “…the fact that some choice is good doesn’t necessarily mean that more choice is better … there is a  cost to having an overload of choice. [Ellipses added]”

In this article, we share insights from The Paradox of Choice and discuss the potential implications of increased choice for investors. Investors cognizant of the potential pitfalls surrounding choices and decision making may find success in adhering to a disciplined investment strategy.

THE PROLIFERATION OF CHOICE, AND THE CUMULATIVE EFFECTS

Schwartz acknowledges that American culture, in particular, treasures freedom of choice, variety, and self-determination. More choice may suggest more control, a lack of restriction, and imply more opportunity. As he notes, “Our culture sanctifies freedom of choice so profoundly that the benefits of infinite options seem self-evident.”

However, Schwartz identifies several psychological processes that may accompany more choices and impair our decision making, reflecting behavioral biases such as adaptation, regret, missed opportunities, raised expectations, and feelings of inadequacy in comparison with others.

In short, Schwartz argues more choice does not always result in good decisions. The modern exponential growth in options and opportunities demands more and more of our time and concentration, Schwartz argues, with ubiquitous choice leading to three “unfortunate” effects:

1) Decisions require more effort
2) Mistakes are more likely
3) The psychological consequences of mistakes are more severe

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The Investors Paradox – Making Intelligent Decisions Amid More Choices 060208