In his book Paradox of Choice, Dr. Barry Schwartz identifies several key reactions people have when confronted with too much choice.
- Escalation of expectations – Expectations can be significantly detrimental to one’s ability to be happy with a situation. If you are given only two options, your expectations are going to be fairly low. Regardless of what you choose, chances are you will not be overly disappointed in the long run. But, if you’re given dozens of choices, your natural inclination will be to assume that one of those options must be a near perfect fit. However, since nothing will ever be perfect, no matter what you choose, you’re going to be disappointed by the final result.
- Opportunity cost – If you are presented with only two options, it’s fairly easy for you to figure out whether you’ve chosen the best one. In terms of investing, you can quickly look at the two choices, see the rates of return, and determine if you should move your money or leave it where it is. On the other hand, when you have 50 choices, it is very difficult to determine the best one. Therefore, you are led to imagine that no matter which choice you make, there was probably a better one. That feeling will only decrease your satisfaction with the selection you made. This questioning and unfounded regret then lead to self-blame, the third reaction.
- Self-blame – If you were provided with many options and were the one who made a decision you were ultimately unhappy with (because it wasn’t “perfect” or you felt you might have lost out on another opportunity), there is really only one person to blame, and that’s you.
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While the financial services industry has tried to minimize liability and pursue the vaunted goal of offering customers greater choice, it has instead pushed people away from investing in funds and decreased client satisfaction.
What can financial services firms do to reverse this trend without requiring individuals to use financial advisors for their investment decisions?
The piece above is an excerpt from a new guide, in which we discuss the issues that stem from offering clients too many choices, as well as several concrete steps that can be taken to address them. You can download it here.