According to traditional economics, having more choice is better than having less choice. But that is often not the case in the real world. Behavioral economics professor and Nobel Laureate Richard Thaler shows us that sometimes we are better off when we limit our choices.
Now versus later
Here is Thaler’s example of cashews. Let’s say you have a bowl of cashews on the table that you and your guests consume before dinner. (You can think of tortilla chips or potato chips if that works better.) You and your guests finish off the cashews and you get up to refill the bowl. Your guests ask you not to. Why would they want to limit their choice to eat more cashews? Isn’t that irrational?
This is a perfectly rational request because your guests know that they lack self control. Their immediate desire to eat the cashews outweighs their desire to save room to eat the dinner that will be served shortly. So they rationally ask that you help them achieve their longer term goal by taking away the option of eating more cashews.
A similar thing happens when we try to save for retirement. We have an important long term goal. But we face lots of current needs and wants that loom larger. Retirement is decades away, while the current need or want is right in front of us. Limiting choice — like having automatic deposits to retirement accounts — helps us to achieve the long term goal.
Too many choices
Sometimes the problem is a choice we have to make from too many options. Sometimes that can overwhelm us causing us to make no choice at all. What if you had to explain why you selected each and every item in your basket from the various choices available? You would have to make a reasoned choice for everything from breakfast cereal to mustard. That could take all day.
Retirement plans with too many options
Employer retirement plans often have hundreds of investment options when having 5 or 10 good investment options would be far better. New plan participants may put off enrolling because they are overwhelmed by the choices they have to make. Plan trustees should spend some time paring down options for plan participants rather than having an overwhelming number of investment options — many of which are just plain bad.
When I was eligible to invest in one employer’s retirement plan, I asked the Voya plan advisor to help me find two funds in the hundreds of options Voya offered — an S&P 500 index fund and a fund that invested in a diversified portfolio of bonds. (I wanted vanilla investment options.) It took us over an hour to find something like that in the hundreds of options Voya offered. I shudder to think what the Voya plan advisor was telling other employees to invest in.
Employer retirement plans should be more like the Thrift Savings Plan (TSP) that the federal government offers to government employees. The TSP offers a very limited number of diversified low fee funds to participants. I am fortunate to have a husband with a TSP account. My husband’s TSP account routinely outperforms the diversified low fee investments I have in various employer retirement plans. That is a constant reminder that more choice is not always better.
Lisa Bragança recovers losses for investors all over the country, protects whistleblowers, and defends individuals and businesses in government investigations. She is a member of the Public Investor Advocacy Bar Association (PIABA) and has helped clients recover millions of dollars in investment losses. As a Branch Chief with the SEC Division of Enforcement, Lisa supervised a wide range of investigations of investment fraud.
You can reach Lisa at (847) 906-3460 or BragancaLaw@gmail.com. You can follow Lisa on Twitter @LisaBraganca.
Disclaimer: This information is for general purposes only and should not be interpreted to indicate a certain result will occur in your specific legal situation. The information on this website is not legal advice and does not create an attorney-client relationship.