Press "Enter" to skip to content

The Paradox of Choice

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?

12 Comments

  1. On the occasions that I eat out, it’s always the same restaurant with the same food dish. I know I should try others, but that one makes me happy. Similarly, I don’t wonder about where to go clothes shopping when I do go. It’s always the thrift store. And I’m pretty sure my next car will be the exact same kind that I have now, though I’ll consider one or two other brands. That’s about all I’ll be able to handle. I think I just naturally do better with constraints. Otherwise, I feel overwhelmed, and no one wants that.

    • Loux
      Loux June 6, 2019

      Hah! Same. I generally always eat the same few things at the same few places. As for clothes shopping, I know my style and I don’t generally deviate from it (although there is a wide range of options to choose from. But generally, I know right away if I like something, and I’m drawn to it instinctually). Next car… yeah, it’s going to be the same brand, and a very similar style of vehicle for sure.

      I think it’s just good to have the stability that comes along with knowing what you like. Someone who is always looking for the next best option, i.e. a maximizer, will generally never be happy. I learn to be content with what I have, even if it’s not always great. And if I really can’t be content with it for whatever reason, then I attempt to change it.

    • FullTimeFinance
      FullTimeFinance June 6, 2019

      I tend to frequent a small group of restaurants at home and the same 1-2 menu choices. When I stray from those I usually regret it.

  2. xrayvsn
    xrayvsn June 5, 2019

    I hear you about being overwhelmed with choices at some restaurants, Cheesecake Factory being one.

    Sometimes it works to a restaurants favor as I will come back to continue to try the other intriguing items.

    I often feel real estate agents when showing homes purposely show you a home or two above your agreed budget and that makes you crave things more and potentially get you to send above your means and increase their commission.

    Index investing is a great way to make it simple, you just choose everything on the menu (as in the case with a total stock index fund).

    • FullTimeFinance
      FullTimeFinance June 6, 2019

      Great point, another mental bias in anchoring. Anchor them to something high end initially and everything cheaper falls short.

  3. bill
    bill June 9, 2019

    I do not invest unless one of two newsletters i subscribe to have the equities or bond funds listed as a buy. When they say sell i do sell. I really does make things simpler and I have been happy with the results ( over last 20 years). YMMV of course.

  4. My wife and I have struggled with this challenge for many years. It was a “problem” when we were ultra-high earners, and it continues to be an issue post-FIRE. Not sure what the solution is, but it’s something we continue to discuss as a family.

    An interesting related point: People we’ve seen in other countries with fewer choices seem just as happy – maybe happier than many Americans. We’ve been on multiple overseas mission trips to poor areas of the world (Kenya, Togo, Honduras, even here in downtown Charleston, etc.) and a big takeaway for me has always been: Even in the harshest situation, there are always people who are joyful.

    In Kenya people living in grass huts with no water or electricity can be very content and joyful. Part of the reason, I think, is that they “have what they have” and don’t know any different. So they aren’t constantly in want of “things”. If the well a mile away has water, they can be very content.

    • FullTimeFinance
      FullTimeFinance June 10, 2019

      So very true. We tend to judge happiness based on what we see around us. 100 years ago the richest among us had nothing on today’s poorest in terms of quality of life. And yet I doubt people are much happier today then they were way back when. So I guess the best we can hope for is a way to filter out the noise and have gratitude for what we have.

  5. Max Out of Pocket
    Max Out of Pocket June 10, 2019

    It would be interesting to look at a business who standardizes their offerings and track customer service complaints along side that change. Definitely seems like we would see a corresponding reduction of calls to the customer service department. In some cases, it would also be great to just simplify the product itself. We see a lot of this in healthcare, patients not understanding their insurance product which leads to unexpected bills and complaints downstream. Where was that photo taken?

    • FullTimeFinance
      FullTimeFinance June 10, 2019

      That picture was taken in Iceland last year.

      Health care really is an interesting one as the whole pricing structure is opaque to most individuals. I literally have no idea how much I will get charged for an emergency room visit until a bill shows up. That doesn’t lend itself well to planning or customer happiness.

      • Max Out of Pocket
        Max Out of Pocket June 10, 2019

        Nice! We were out there a few years back and did the Golden Circle, it was great and I wish we spent more than four days there. ER pricing is interesting and a bit broken and way too complicated. You are basically assigned a level 1-5 visit charge depending on the resources used by the facility (nurse time, room, etc). That level assignment can differ by hospital since each hospital should have their own policy for assigning visits. There is also a separate professional charge assigned to account for the provider time, decision making, etc. You can also be charged for various procedures a la carte, which makes it questionable if it is appropriate for a higher level visit assignment at the same time. Not to mention expecting your average consumer to understand all of this. : )

        • FullTimeFinance
          FullTimeFinance June 10, 2019

          Interesting. Thanks for shining some light on the opaque.

          We did the Ring Road last year. It was a blast. We hope to one day visit again.

Leave a Reply

Your email address will not be published.