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

By in Mind and Money, Personal Finance

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.

  • 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