Today, everyone faces a dizzying array of choices across all aspects of their lives—from what kind of coffee to drink to which dating website to search, to how to invest for the future.
While it is widely assumed that the more choice we have the better off we are, “too much choice can paralyze people in their decision-making,” said Sheena Iyengar, a Columbia Business School professor who has done extensive research on the subject and recently presented at IMCA’s 2017 Investment Advisor Forum.
Deciding between a wide variety of choices is difficult because our minds can only take in so much information, choices often aren’t differentiated, and we see choices as defining who we are and how others perceive us. Decision-making is a high-stakes endeavor because people want to feel unique in their choices, but not like outliers.
“Investment advisors are not merely in the business of asking people what they want and providing that to them. People want help figuring out what they want and to ultimately feel confident in their choices,” explained Iyengar. To do this, she recommends that advisors follow her rule of the four C’s—cut, concretize, categorize, and condition:
Cut. Pare down choices to a manageable number. Numerous studies have shown that people are more apt to make purchases or other decisions when they are presented fewer, not more choices. For example, Iyengar shared an example of an extensive study conducted by The Vanguard Group that found that people were more apt to enroll in retirement plans if they had fewer investment choices than if they had more.
Concretize. Concretize people’s choices, provide them tangible ways of comprehending the implications of any given choice. Consider this: Clients are more likely to be open to retirement preparation if they are shown pictures of elderly persons than if they are given a brochure describing why saving for retirement is important.
Categorize. It is easier for people to make choices if their choices are grouped into categories. Iyengar suggests using the visual of a magazine rack: “If magazines are simply arrayed in a random manner on shelves, it’s difficult for people to find what they are looking for, but if the magazines are grouped by subject, such as travel, business, etc., people can more easily find the type of magazine they are looking for, eliminate many choices, and narrow their choices to a few that they can handle. In financial categories, three to five choices each is probably adequate.”
Condition. Condition for complexity so that clients don’t feel overwhelmed and unable to make choices. Iyengar recommends that advisors or other choice providers should help clients consider successive decisions by introducing them to decisions with the fewest choices first, then gradually work up to decisions with increasing numbers of choices.
“Start me on the shallow end,” says Iyengar, channeling how those facing complex decisions are likely to feel.
