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Decisions, Decisions: Too Much Choice Hard for Investors
In a world where 24-hour, on-demand access to millions of consumer products is available via the Internet, you may expect that modern investors thrive when given a broad spectrum of investment choices. But recent research into investor decision-making is finding that more is not better.
Investors faced with too many choices become paralyzed and make bad decisions—according to a recent study from Columbia Business School and the University of Chicago Booth School of Business. ["Choice Proliferation, Simplicity Seeking, and Asset Allocation," Sheena S. Iyengara & Emir Kamenica] These results expand on previous research that found that employees are less likely to enroll in an employer retirement plan with too many investment choices.
In the first study presented in the paper, one group of subjects was presented with 11 gambling options, including 10 riskier options that offered higher payouts and one simple, safer option that offered less of a payoff than the other options. The other group of subjects was given three gambling options, one of which was the safer option that was presented to the other group. The study found that the first group—presented with more complex options than the second group—was more likely to choose the safer option than the first group.
The study also specifically examined the allocation behavior of individuals faced with 401(k) investment options, looking at real data about the investing decisions of 500,000 employee participants in 401(k) plans. Researchers found that for every 10 additional investing options presented by a plan, equity allocation decreased by 3.28%. Additionally, for every 10 additional funds, the probability that participants will allocate no assets to equities increases by 2.87%. And investors under 30 are just as sensitive to investment choices as older investors.
These studies offer advisors a lesson in client presentation: When presented with a complicated set of choices, investors tend to gravitate to the simplest choice—which often may be the least profitable choice. Worse, investors are also more likely to tune out when presented with complex investment options.
Simplicity is the key to effective communication about investment choices. Narrow choices down to three or four distinct options. Full disclosure has its place—and it isn’t during the initial stages of a client meeting. Clients need clarity to make suitable investing decisions.
For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s partner, AdvisorFX, for a free trial.
See also The Law Professor's blog at AdvisorFYI.
About the Author
Robert Bloink, Esq., LL.M.
Robert Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law.
Previously, he served as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers, and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country.
Mr. Bloink's insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures.
About the Author
William H. Byrnes, Esq.
Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow
Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow, is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of 10 books and treatises and 17 chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.
He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.
Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).
Email: wbyrnes@nationalunderwriteradvancedmarkets.com
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