Last week I was traveling for business and we went out to dinner. I really struggled to select what I wanted to eat, but not because I wasn’t hungry. No, the issue was the number of choices left me second-guessing decisions. The paradox of choice in action. This phenomenon makes itself known throughout your life, from investing to jobs and even, yes, what you choose to eat for dinner.
Defining the Paradox of Choice: How it Leads to Unhapiness
What is the paradox of choice? As an individual, we often assume more options are better. As a company selling say ice cream we sell more flavors to attract more customers. And yet, study after study shows this is the wrong approach.
The reality is the more options you have, the less likely you are to be happy with your decision. The human condition is to second guess your decision when more options are presented. That second-guessing leads to unhappiness. It also leads to indecisiveness.
My Recent Trouble with Too Many Choices
Take me on my business travel. I looked at a menu with choices from both Chinese and Japanese cuisines. There had to be 100 different options. So I sat there dumbfounded on what to choose. It took me a good twenty minutes to select an option.
If that were the end of it then things would be ok. However, once my bento box arrived it couldn’t possibly live up to the sushi I turned down. I ended up severely disappointed with my food choice.
No, this result wasn’t just because of a crappy restaurant. Study after study shows that too many choices leads to a lack of satisfaction in choice. It’s probably why people were so satisfied with Model T Fords when they all came as black, versus these days where no one ever seems to be satisfied with what they drive for very long.
Standardizing your Business Offerings
So what does this all have to do with finance? Well, a few things actually. The obvious is if you want to open a small business. Standardizing your offerings will likely lead to greater success and happier customers. Still, not all of us can create a business, that does not mean the paradox of choice is not applicable to your life.
Hedonic Adaption and the Paradox of Choice
The second application is your expenditures. If you give yourself too many options for expenditures then it will lead to hedonic adaptation. You’ll essentially never be happy with what you buy, constantly looking for the next big purchase. However, if you artificially limit your choices the likelihood of being able to control your expenditures increases.
For example, if I’m considering a new car purchase. The first step I do is to narrow in on criteria in a way that there are only a few choices of car. That narrow down keeps me limited in comparison to only that narrowed field, potentially increasing my happiness. It also increases the likelihood that I will not go car shopping every 3 years for the next best thing. This variation for the paradox of choice is probably applicable to the vast majority of people.
Investment Decisions and too Many Options
Another way for most people to view the paradox of choice is in investment decisions. I’ve harped on indexing as a great investment in the past. A lot of my statements to date have been regarding the issues with picking a good investment choice. But honestly, the issue goes beyond the concern with making the correct active choice.
You see if you consider a world of all possible investments, say every possible stock, asset class, or activity then essentially you will never be happy with your investment decisions. You might even become obsessed. That obsession can lead to poor decisions or worse, unhappiness in your general life.
That doesn’t mean I recommend ignoring your investments or ignoring asset classes. It does mean that I strongly suggest that investing is best done passively. IE. Set an investment plan and then follow it. Put up guard rails for choices ahead of time that funnels you to a few options. That ensures you can both act quickly as necessary and be happy with your choices.
Don’t underestimate the value of my last sentence. The point of investing is to support the happiness of your life. Money and investing are just tools not goals. If you spend all your time worrying about whether you made the right choices or the markets next move then you are missing the point.
More Reading Possibilities on The Paradox of Choice
A great option for reading more on the paradox of choice is Richard Thaler’s groundbreaking book on “Nudge”. Thaler’s biggest claim to fame is the suggestion that employees made better choices and were happier with fewer choices in their 401Ks. Employees also were shown to do better when the default solution was to invest, rather than having to make a decision to invest. The reasons were exactly the same as my point in this article. Limiting choices leads to more optimal results, the paradox of choice.
Do you artificially constrain your choices in certain scenarios? Do you find yourself less happy when presented with more options?