Posted by: Professionals In Human Resources Association (PIHRA) | March 6, 2012

The Paradox of Choice – Findings from Behavioral Finance Impact Retirement Plan Participant Outcomes

The Paradox of Choice – Findings from Behavioral Finance Impact Retirement Plan Participant Outcomes


By Brant Griffin

Having numerous choices can impair one’s ability to make a good decision. Behavioral economic studies have shown that when confronted with too many choices, people tend to resort to what they already know or merely default to the simplest alternative. This paradox of choice is a highly researched concept in behavioral finance. Simply, the wiring of our brains is deficient in incorporating and analyzing too many choices without difficulty.

To illustrate this concept Columbia Business School Professor, Sheena Iyengar, performed the classic study in 1995 often called the “jam study”. To document shoppers’ behavior, a booth containing jam was set up at a California gourmet market periodically alternating between a selection of twenty-four varieties of jams and a choice of only six. The study found that although the set of twenty-four jams drew more people, only 3% of those customers decided to purchase a jar compared with 30% of the people who sampled from the smaller assortment. Reference to the “jam study” often explains that although the presence of choice is theoretically appealing, in practice individuals are reluctant to make a decision when confronted with too many alternatives.

Another study with Professor Iyengar and by S. T. Lee, Professor of Business, Management, and Emir Kamenica, Associate Professor of Economics, University of Chicago Booth School of Business, analyzed information and investment decisions of more than 500,000 employees with 638 companies’ retirement plans. This study found that when employees were presented with a large number of investment choices in their retirement plans, the decisions made were suboptimal and often resulted in a tendency to invest in the most conservative of the choices offered (or the ‘path of least resistance’). Also, the employees were less likely to enroll in the plan, though they understood the importance of saving for retirement. The study discovered that with every additional ten funds in a plan, the allocation to equity funds decreased by more than 3%.

In similar research at the College of William and Mary, a group of employees was subdivided in accordance with their investing knowledge. It was found that despite the level of investment sophistication each individual held, when the number of fund choices in the 401(k) plan increased, both groups would defer to an overly-conservative choice.

From a behavioral context, it seems that by offering fewer choices we free ourselves from the paralysis of complex decision-making. It is crucial for plan sponsors to understand this concept when designing their plan’s investment menus by avoiding investment overlap and maintaining an array consistent with the level of education provided to its employee and their investment experience.


North Pier Fiduciary Management, LLC is dedicated to offering a full array of consulting services for retirement plan fiduciaries. North Pier works closely with its select clientele to thoroughly comprehend their needs, and construct and execute customized solutions. We are independent, fee-only, vendor-neutral advisers with no conflict of interests. North Pier is a true advocate to its plan clients; we are your ‘prudent experts’.

North Pier provides retirement plan advisory services, including investment monitoring and reporting (as either ERISA 3(21) or 3(38) Fiduciary), retirement plan provider search and implementation, fiduciary process management and analysis, plan service/cost benchmarking, service provider and advisor negotiations, and employee education and advice. North Pier’s partners exclusively function as their clients’ consultants, their analysts, and their relationship managers.



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