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Investing is complicated and multi-faceted. I’m impressed with advisors’ depth of knowledge gleaned from their own studies, experience, academic literature and attendance at numerous conferences.

Prospects
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Prospects

When meeting with prospects, advisors want to demonstrate their expertise. You also may feel a need to justify your fee by showing the value you add by helping your clients reach their retirement goals.

Unfortunately, the way advisors convey information ignores basic principles of neuroscience. It is the equivalent of pouring water into a glass that is already full.

The brain has limited capacity

In his excellent book, The Science of Selling, David Hoffeld correctly noted, “Our minds can perform incredible feats, but they also have limited cognitive resources.” The brain can only process a modest amount of information at any one time.

In 1955, famed psychologist George A. Miller published The Magical Number Seven, Plus or Minus Two. Some Limits on Our capacity of Processing Information. He concluded there are “severe limitations on the amount of information that we are able to receive, process, and remember.”

When the brain is confronted with too much information by being presented with numerous options, the ability to make a decision is seriously inhibited. One study found that people were more likely to purchase gourmet jams or chocolates or undertake optional class-essay assignments, when they were offered only six options rather than 24 to 30 choices.

Participants in these experiments who were given limited choices were also more satisfied with their selections.

Another study referenced by Hoffeld, examined how employees in 401(k) plans were affected by the number of investment options offered in the plans. The authors reviewed data from 800,000 employees. They found participation rates fell when more investment options were offered. Plans offering “a handful” of funds had higher participation rates than those with 10 or more options.

This study is consistent with other research finding that, when making complex and important decisions, too much choice (and being overwhelmed with information) often causes indecision and procrastination. One researcher stated, “When we make decisions, we compare bundles of information. So a decision is harder if the amount of information you have to juggle is greater.”

By Dan Solin, read the full article here.

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