Don't Fall for Money Mind Tricks (Part 3)

By in Mind and Money, Personal Finance | 12 comments

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  • In Part one you learned about the perils of MENTAL ACCOUNTING and ANCHORING, along with tips to combat these mental demons.  
  • In Part two, the insidious LOSS AVOIDANCE and FRAMING were introduced.
  • In Part three, today, get the information on THE PARADOX OF CHOICE

 “More choice is not always better, she suggests, but neither is less. The optimal amount of choice lies somewhere in between infinity and very little, and that optimum depends on context and culture.” Sheena Iyengar

Too Many Choices = Bad Decisions = THE PARADOX OF CHOICE

How can this be logical? One would think if you have lots of choices, you would make a superior choice.

Not so.

Sheena Iyengar, Columbia professor and author of The Art of Choosing published this fascinating experiment:

She set up a table in a fancy market and offered FREE SAMPLES of jam to shoppers.

Group 1: Customers chose from 6 varieties of jam.

Group 2: Customers chose from 24 varieties of jam.

Which group do you think bought more jam, after their free sample?

 One third of group 1 members subsequently BOUGHT jam.

Only 3 percent of Group 2, those confronted with 24 types of jam, ultimately bought a jar.

How did she explain this phenomenon?

THE PARADOX OF CHOICE EXPLAINED

Iyengar also found that those who chose from a greater number of options were more dissatisfied with their purchase.

Faced with too many choices, consumers become overwhelmed and paralyzed.

This plays out poorly with money decisions.

If there are too many spending choices, we commit to one and stick with it, even if it’s not the most economical.

Have you chosen an insurer and stuck with the company through thick and thin just to avoid the task of wading through all the competing companies?

We frequently decide it’s easier to stick with what we know, even though it may not be the best financial decision, instead of facing many other choices.

We do this with our Verizon FIOS. We have the premium package which includes cable, premium channels, land line and internet for a big fat monthly fee. We use the services, enjoy them, and even take advantage of all of the “on demand” programming.

But, I don’t actually know if this is the best financial choice for us. I haven’t comparison shopped for several years because it seems too overwhelming and I really like what we have!

SOLUTION; COMBAT THE PARADOX OF CHOICE

There is a rebuttal for dealing with the excessive availability choices.

Every year, set time aside to review some of your financial commitments such as insurance, phone, television, and more. It may take a few hours, but it could save you hundreds or thousands of dollars a year.

Another alternative is this; TAKE THE PRESSURE OFF YOURSELF.

You are the only one who decides what something is worth FOR YOU.

Even if my Verizon bill seems excessive for you, it may be worth it for me!

That’s why it’s called PERSONAL finance.

Want a chance to win a $25.00 Amazon gift card? I sponsored a contest over at Mom’s Plans. Sign up for my RSS feed and head over here to enter.

BARB RECOMMENDS

  • Len Penzo zaps personal finance truisms!
  • Remember to keep on track! Here’s motivation from Everyday Tips and Thoughts
  • Fascinating expose on the extreme couponing movement at Yes I am Cheap

 Barbara Friedberg Personal Finance Across the Blogosphere

When do you experience the PARADOX OF CHOICE?

image credit; saraelliott

    12 Comments

  1. This is why index funds are so popular and people do so poorly investing. There are too many investment options. It is one of the reasons why I am seeking to figure out how to make money with options by taking stock selection out of the equation trying to prove that it is possible to make money with a limited criteria for stock picking and then reacting to the market rather than predict it.

    optionsdude

    May 25, 2011

  2. I agree with Options Dude. There are so many options out there it can leave many investors lost and confused. Index funds do have their place but a balanced portfolio is the best approach.

    Miss T@ Prairie Eco-Thrifter

    May 25, 2011

  3. I believe you can take an active part in your choices. I routinely (every 5 years) check my insurance costs as well as other recurring expenses. I may check 10-20 companies, but decide over just a few. When faced with a lot of choices, you need to dismiss the ones that don’t fit.

    krantcents

    May 25, 2011

  4. I think that’s why companies try to simplify their 401k plan now. It’s just too complicated for people who don’t know much about finance. When I first started working, it took a while to pick which fund to invest in since I didn’t know much about investing. From what I understand, many people got overwhelmed with choices and just don’t invest.

    retirebyforty

    May 25, 2011

  5. @Options-Your comment is an interesting take on simplicity.My thoughts on trading options is that it requires quite a bit of maintenance and sophistication.
    @Miss T- I’m in accord with your thinking and like to limit the universe of index funds/etfs to a relatively smallish pool and not to get too exotic. You don’t need unlimited diversification.
    @Krantcents-Every 5 years seems quite reasonable for that type of checking and is less overwhelming than going through the exercise annually.
    @Retire-Your comments about 401K’s with too many choices is quite true. There is research that unless the process is outlined very simply or individuals are automatically enrolled, they won’t even try to invest.

    Barb Friedberg

    May 25, 2011

  6. Barb,
    Options don’t have to be complicated. Of course, they can be and people try to make it so, but I try to determine my prices, enter limit orders and not trade after that. I could probably trade 2 days a month and do just fine.

    optionsdude

    May 25, 2011

  7. I try to narrow down my choices by going with providers I trust. That way I’m not bombarded with too many choices feeling overwhelmed. With my mutual fund, I only wanted to use my insurance provider since they offered me no minimum initial deposit, but instead a monthly recurring deposit. That limited me to a handful of funds that I researched the heck out of. Now, if I could only find a lower cost internet provider (or the time to research them) I’d be in great shape!

    Little House

    May 25, 2011

  8. Hi Little House, Good strategy for keeping your sanity. BTW, when you find that lower cost internet provider, let me know 🙂

    Barb Friedberg

    May 26, 2011

  9. Choice is good, but you need to have the information to benefit from that choice. When there is a lot of choice, I agree, it can become overwhelming. Hence why many people prefer iPhone since they don’t have to worry about the consequences of choosing a poor phone model since there is tons of information and history with this one model. But, it’s still good that we have plenty of models to choose from so that those who want something else still have that choice. 🙂

    Invest It Wisely

    May 26, 2011

  10. I find that the more choices I have, the more I don’t chose anything. It seems to many choices shuts down the whole process. I would be able to make a choice or purchase easier with only a hand full of choices. 24 varieties of jam, would make me just walk away.

    Dave@50plusfinance

    May 26, 2011

  11. @Options dude- I find, if I have an open call, I am constantly watching the price of the underlying security. But, 2 times a month is quite infrequent!
    @Kevin and @Dave- I experience this personally. I think 6 choices (as long as my fav is included) is about right :). When I bought a new mattress, I thought I was going to go nuts with all of the choices!

    Barb Friedberg

    May 26, 2011

  12. Too many choices do tend to stress and confuse us. However, the fact that there are many things to choose from should always work for our advantage. It may demand for more time and perhaps some discipline but then again, it probably is better than having just a few options.

    Andrew Clarke

    mortgage dallas tx

    November 17, 2011

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