Social scientist Sheena Iyengar once ran a famous experiment. She and her assistants set up a jam sampling table at a food store and polled customers on preferred flavours. Over two weekends, they offered two alternative "menus" of jam flavours to customers. For one hour at a time, they offered customers a choice of six flavours. Then, for the next hour, they offered a choice of 24 flavours, and then they rotated back to six choices. All customers were offered free tastes and a discount coupon, which they could use to buy the flavour of their choice.
A total of 145 people sampled the 24-choice set and four of them bought jam. A total of 104 people sampled from the six-choice set and 31 of them bought jam. That is an 8:1 ratio, which is a truly astounding result.
Why did far more customers buy jam when they were offered far less choice? One interpretation is that the mental mechanism that handles choices freezes when we're offered too many choices. This runs counter to the basic axiom that choice is good. It could be that too much choice is not so good because our brains can't process it.
However, this experimental result was so counter-intuitive that it forced marketers and social scientists to re-examine some basic axioms. If there is some truth to the theory of "mental freeze", there are obvious applications for anybody selling consumer products. That includes the subset of financial products and assets geared for retail customers.
This experiment has been cited time and again by the financial services sector because retail investors have truly bewildering arrays of choices. Investing directly, they have to choose between thousands of listed stocks and multiple debt instruments. Or, they can buy hundreds of different mutual funds, which package those stocks and debt instruments in different proportions. Or, they can buy unit linked insurance plans (Ulips). Or, they can invest in various pension plans and provident fund schemes. It would not be surprising if the retail investor's mind freezes and becomes incapable of making any choices at all in such circumstances.
Obviously, some people's minds don't freeze and they make good choices. Others are serviced by personal financial planners or their chartered accountant, or bank relationship managers, who might make good choices on their behalf. Many others do freeze and either make sub-optimal choices or don't take decisions at all.
Behavioural scientists have extrapolated further from these investment patterns. Some people are maximisers and perfectionist by nature. Others accept reasonable results, rather than seeking perfection in all they do. The perfectionists are more likely to freeze or make sub-optimal financial choices, than the people satisfied by reasonable returns.
This gels intuitively with the jam experiment. Given fewer choices, most of us can make good decisions. Given a lot of choices, some people will like one flavour and buy without worrying about whether it is the very best. Others can't make up their minds at all.
Somebody who's a perfectionist will agonise over the details of, literally, millions of possible combinations of assets they can hold in their financial portfolios. Another person who is less of a perfectionist will choose the options that seem to more or less fit with his goals, without going through this rigorous exercise.
Investing is an inherently inaccurate exercise. There is no way to achieve perfection or even perhaps, to define perfection. Make informed choices but don't kill yourself and waste time and energy trying to make the very best choice.
A total of 145 people sampled the 24-choice set and four of them bought jam. A total of 104 people sampled from the six-choice set and 31 of them bought jam. That is an 8:1 ratio, which is a truly astounding result.
Why did far more customers buy jam when they were offered far less choice? One interpretation is that the mental mechanism that handles choices freezes when we're offered too many choices. This runs counter to the basic axiom that choice is good. It could be that too much choice is not so good because our brains can't process it.
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There could be other explanations - the experiment was resource-strapped. It was tried in just one store on two successive weekends. Ideally, it should have continued for weeks and been hosted at many stores across different regions. Hence, there might have been many biases in customer base, time of year, etc. Indeed, similar experiments carried out on larger scales across multiple categories of consumer goods have come up with different and much less striking results.
However, this experimental result was so counter-intuitive that it forced marketers and social scientists to re-examine some basic axioms. If there is some truth to the theory of "mental freeze", there are obvious applications for anybody selling consumer products. That includes the subset of financial products and assets geared for retail customers.
This experiment has been cited time and again by the financial services sector because retail investors have truly bewildering arrays of choices. Investing directly, they have to choose between thousands of listed stocks and multiple debt instruments. Or, they can buy hundreds of different mutual funds, which package those stocks and debt instruments in different proportions. Or, they can buy unit linked insurance plans (Ulips). Or, they can invest in various pension plans and provident fund schemes. It would not be surprising if the retail investor's mind freezes and becomes incapable of making any choices at all in such circumstances.
Obviously, some people's minds don't freeze and they make good choices. Others are serviced by personal financial planners or their chartered accountant, or bank relationship managers, who might make good choices on their behalf. Many others do freeze and either make sub-optimal choices or don't take decisions at all.
Behavioural scientists have extrapolated further from these investment patterns. Some people are maximisers and perfectionist by nature. Others accept reasonable results, rather than seeking perfection in all they do. The perfectionists are more likely to freeze or make sub-optimal financial choices, than the people satisfied by reasonable returns.
This gels intuitively with the jam experiment. Given fewer choices, most of us can make good decisions. Given a lot of choices, some people will like one flavour and buy without worrying about whether it is the very best. Others can't make up their minds at all.
Somebody who's a perfectionist will agonise over the details of, literally, millions of possible combinations of assets they can hold in their financial portfolios. Another person who is less of a perfectionist will choose the options that seem to more or less fit with his goals, without going through this rigorous exercise.
Investing is an inherently inaccurate exercise. There is no way to achieve perfection or even perhaps, to define perfection. Make informed choices but don't kill yourself and waste time and energy trying to make the very best choice.