Sunday, April 01, 2007

Sunday dollars+sense: choosing puts us in a jam

What can jars of jam tell us about our ability to pick the right superannuation fund? In the late 1990’s psychologists Sheena Iyengar and Mark Lepper from Columbia and Stanford universities set up a jam-tasting booth in a Californian gourmet grocery store.

On display were exotic flavours including kiwifruit, black cherry and lemon curd.

They asked shoppers approaching the booth to try as many as they wanted and then if they liked one in particular, buy it using a discount coupon.

They varied the number of choices on offer. At times they had a big number – 24, at other times a limited choice of 6.

Their first finding was expected... When lots of flavours were on offer many more customers stopped. They liked the idea of lots of choice.

The second finding was bizzare.

When lots of choices were on offer hardly any of the customers actually bought - only 3 per cent were able to make a choice and buy.

But when the choice was limited, 30 per cent chose and bought.

We like choice, but too much of it seems to leave us paralysed with indecision.

Then Iyengar and Lepper experimented on their
students. They offered higher marks to students who attempted an optional extra essay.

They gave some of the students a choice of 30 potential essay topics, others only 6.

Again the students given the limited choice were far more likely to take up the offer (and interestingly, they wrote better essays).

Iyengar and Lepper have come up with a guesstimate of just how much choice we can comfortably handle. They say when the number of choices on offer climbs too far above 7, we get uneasy.

They say superannuation plans are an exception. There, when the number of choices on offer climbs above 2 we get uneasy.

In the US, putting money into superannuation is voluntary. Iyengar examined the super status of 800,000 workers and found them most likely to put money in when they worked for an employer who offered them a choice between only two funds.

Most Australians have been free to choose between competing super funds since mid 2005. But very few of us have made the effort.

We like the idea of choice, but the more choice we have the harder we find it to actually decision. Poorly performing super funds charging high fees count on it.

Iyengar, S. S.,&Lepper, M. R. (2000). When choice is demotivating: Can one desire too much of a good thing? Journal of Personality and Social Psychology, 79, 995-1006.