Iyengar, S., & Kamenica, E. (2010). Choice proliferation, simplicity seeking, and asset allocation. Journal of Public Economics, 94, 530-539.
- This study used two laboratory experiments to examine the relationship between the number of choices offered and decision making.
- Individuals were asked to choose between risky gambles and sure payoffs, with the number of choices randomly determined.
- The authors found that when individuals were presented with a larger number of choices, they tended to choose simpler payoff options.
- The quality of the causal evidence presented in this portion of the study is high. This means we are confident that an increase in the number of choices an individual is given causes him or her to choose a less complex payoff option.
Analysis of 401(k) data
- The study further aimed to determine whether the number of fund options offered by a 401(k) plan influenced the share of assets allocated to a given class of funds (for example, equities or bonds) by plan members.
- The authors analyzed differences in portfolio allocations based on the number of funds available using regression analysis, controlling for other 401(k), firm, and employee characteristics.
- The analysis demonstrated that as the number of investment options increased, people tended to allocate more of their 401(k) savings to money market and bond funds at the expense of equity funds.
- The quality of causal evidence presented in this portion of the study is low. This means we cannot be confident that an increase in the number of funds offered in a retirement plan causes an increase in the share of funds allocated to money market and bond funds and a concurrent decrease in the share of funds allocated to equities.
Changing the Number of Risky Choices
- In the experimental settings, people were more likely to choose simpler and less risky options when they were offered a larger number of choices.
- The share of funds allocated to equities decreased as the number of total fund options increased. On average, for every 10 funds added to a plan, allocation to equity funds decreased by 3.28 percentage points.
- An increase in the total number of funds offered in a plan was associated with an increase in contributions allocated to bond and money market funds. Specifically, an increase of 10 funds in a plan was associated with a statistically significant 1.98 percentage point increases in the share of funds allocated to bonds. The share of funds allocated to money market accounts also rose, but this change was insignificant.
Considerations for Interpreting the Findings
The two experiments were randomized controlled trials with low attrition. Additionally, there were no apparent confounds that could lead to biases in these results. Note, however, that the results of these experiments should be interpreted carefully. This study analyzed peoples’ responses to gambles involving small amounts of money. The choices observed might not accurately reflect decisions people would make about savings for retirement when large sums of money are potentially at risk.
The regression analysis of actual investment decisions controlled for important employee-, plan- and firm-level variables; however, this analysis essentially compared individuals with access to a larger number of investment options with those with access to a smaller number of options. It could be that those who invest in funds offering a larger degree of choice are inherently different from those invested in other plans. For example, better employers might offer employees a more exhaustive list of 401(k) investment options. The authors acknowledge this potential issue but cannot completely dismiss the concern.
Causal Evidence Rating
The quality of causal evidence presented in this study is high, based on the estimates from the randomized controlled trials. A high causal evidence rating means that we can be confident that the differences in the number of options offered to people led to the observed differences in their choices. The quality of the causal evidence presented by the analysis of actual investment decisions is low. A low causal evidence rating means that we cannot be confident that the differences in the shares of assets allocated to funds in a particular class was the result of the number of investment options alone. Other factors are likely to have contributed.