CHOOSING TO BE DECISIVE – OR NOT
Dr Sheena Iyengar, social psychologist and professor at Columbia Business School, studies how people make choices. And, as it turns out, the art of making decisions can shape everything from what jam we purchase to how we make an investment or even save f
You enter a glitzy casino, feeling good about your odds and ready to gamble. Before you, there are two gaming tables: one has a single roulette wheel and the other has two. Which table draws your attention? Where do you start laying your bets? According to Dr Sheena Iyengar, social psychologist at Columbia Business School and author, the odds are that you’ll choose the table with two wheels. Why? We are innately attracted to the notion of having choice, whether it serves our interests or not. It’s a lesson that Dr Iyengar has learned after a professional career studying the way people make choices, be it buying a jar of jam or picking a stock.
Choice can be both comforting and confusing. The modern consumer has more choices available to them than ever before – we’re conditioned to presume that more options are better than fewer. Yet, on the other hand, we may not even be aware when we’re actually making decisions. In one of Iyengar’s studies, which asked over 2,000 Americans to selfreport how many decisions they make in a day, the average number reported was 70. The actual figure is estimated to be around 35,000.
In her role as the ST Lee professor of business at New York’s Columbia Business School and the author of bestselling book The Art of Choosing, Iyengar has spent two decades unravelling the intricacies involved in making (and not making) decisions. She gained widespread acknowledgement in the mid 90s for her “jam study”, which she undertook as a PHD student at Stanford. In the study, she laid out two stalls in a supermarket – one with six flavours of jam, and one with 24 flavours. While more people stopped and showed interest when there were more options, customers were six times more likely to actually buy a jar when presented with fewer varieties. A wider choice, while appealing, ultimately became overwhelming. “Some people have taken this study to argue that we should eliminate choice,” Iyengar points out, highlighting American psychologist Barry Schwartz, author of The Paradox of Choice – Why More is Less, as an example. “I respect his opinion but I don’t agree with it.”
After her book was published in 2010, Iyengar was invited to give a TED talk on “the art of choosing”, and another the following year on “how to make choosing easier”. The two talks have since been viewed online over four million times.
The principles exemplified by the jam experiment apply equally in the somewhat less saccharine world of investment and financial planning, in which choice clearly plays an integral role. One study Iyengar conducted with Vanguard, for example, looked at the impact of choice on uptake of 401(k) retirement plans in the US. “If you give people a wide choice [of plans] they are less likely to invest in their retirement. And even if they do, they are more likely to avoid stocks or put all their money
in money markets – and that is not good for long term financial investment,” says Iyengar, who has worked as an advisor for several financial institutions. “Other scholars such as Richard Thaler and Cass Sunstein have suggested the idea of automatic enrolment – they called it libertarian paternalism. When [people are] automatically enrolled [in a plan], participation goes up to around 95 per cent.”
In the US, since these findings were released, more regulations have been put in place and around 50 per cent of companies now have automatic enrolment, with most companies offering a much simpler selection of target date funds. This has promoted a dramatic shift in uptake. “It went from having companies’ plans offering hundreds of options, down to 15 or so simple options,” says Iyengar. “That has actually shaken up the industry quite a bit because the reduction means an awful lot of funds got killed, and so lot of companies had to refigure out how they were going to make money.”
But, despite the States’ shift to paternalism, there are still swathes of people left out of the system. “You have 30 to 40 per cent of adult Americans who don’t save anything, and that is incredible,” Iyengar says. “We don’t really have safety nets the way Europe does.”
MAKING THE RIGHT CHOICE
When it comes to making good investment decisions, Iyengar’s first piece of advice is to be brutal. Cutting swathes of extraneous options will ensure you’ve got the most time to spend thinking about the options that matter the most. If you’re finding it hard to know which options are the important ones, simply ask yourself exactly how several stock options actually differ from each other. If you can’t put your finger on it, that tells you all you need to know.
Iyengar’s research has also indicated that people are best placed to handle large data sets when the information is categorised into distinct groups – even if the categories are largely arbitrary. So starting out with a set of wellorganised options will help you to avoid being overwhelmed, without the need for increased expertise. Another such trick is to arrange your decisions in order, from simple to more difficult. Iyengar’s research has shown that, when buying a car, people tire and give up much faster when asked to make choices from a high to low number of permutations (specifically: choosing from 56 car colours, down to choosing one of four gear shifts). People do much better making the same set of decisions in the reverse order. Do the easy legwork first, and your brain will respond more successfully when things get tougher.
Concretisation – visualising the real-life consequences of a decision – is another important skill to perfect when planning where to place your money. It’s the reason people spend far more on plastic than when using cash; the result is less tangible, less concrete, when using virtual money or credit cards. Iyengar conducted a study of ING employees, and found that simply asking them to think about the positive impacts of having more savings resulted in a remarkable 20 per cent increase in enrolment of retirement plans, and a four per cent increase in how much went into people’s savings accounts. Applying this knowledge could make it easier for you to decide whether to wager on that high stakes, volatile stock or a sensible, low stakes option; depending on what your circumstances and desired outcomes are.