It’s  always a good thing to have many options to choose from. Whether it be food, entertainment or life partners, we all want to know that we have more than one choice. But, is having too many options a bad thing? In one word: YES. Sometimes having too many choices paralyzes us and makes us worse off because we either end up doing nothing or making a choice and always feeling unfulfilled.

toomany

In the world of consumerism, it is a good thing to have many choices because competition drives prices down and give the consumer more for less. When there are many players in the industry, consumers have the upper hand.  However, when there is a monopoly or an oligopoly, producers have the upper hand because they control the supply. Consumer have little choice and generally get the short end of the stick. Examples of monopolies are Luxottica  and Monsanto.  If you wear glasses, chances are that they came from Luxottica because this company produces over 80% of the world’s major eyewear brands. Another example of a monopoly (one which I personally don’t like ) is Monsanto. Monsanto has a monopoly on seeds, over  80% of the corn grown in America is from Monsanto.

Clearly, as a consumer we are better off when there are more players in the game. However,  because something is good, it doesn’t necessarily mean having more  is better. One of the downside of  having too many options is paralysis by analysis. This occurs when we are faced with too many choices an find it difficult to decide. We over think the decision  and never actually make a  choice. When we are forced to decide we always feel that we could have done better and the choice we eventually made is sub par.

Every had to choose a toothpaste? The varieties of toothpaste have declined over the years, but Crest still has 39 varieties and Colgate has 32 varieties. I don’t know about you, but I do get overwhelmed when I see all those different types of toothpaste. Is there one in particular that would do a superior job of cleaning and protecting my teeth? I will never know because when I am faced with all those possibilities, two things happen.  The first is I get beleaguered with all the choices and to counteract this I default to what I always use. The second is that I get impatient, I don’t have the time or want to use my time to examine which toothpaste is really the best, so I stick to what I know.

With everyday items when faced with too many choices we have a tendency to  default to what we know. This may or may not be the right the decision, but it is a decision and it is one we feel comfortable with.  However, when it comes to making life impacting decisions we don’t have a default to refer to, the default becomes doing nothing. This can have negative implications for us.

The classic case is when trying to decide the best way to save and invest for the future. The financial industry does not make it easy for the average consumer to make a decision.  Stocks, bonds, treasury bills, long term, short term, high risk , fixed income, balance portfolio, etc. The consumer is inundated with so many  options and the smoke and mirror antics of most consultants and bankers, really do not help the situation. The usual outcome  is either  that the consumer hands over the decision making power over to someone else (the financial consultant or someone at the bank) or they do nothing because they feel they need more time to figure it out.

The repercussion of both actions are not good. In the first case, what your consultant or banker decides for you, will always be biased to be beneficial to them more than it is beneficial to you. In fairness to finance professionals this is a natural reaction in many scenarios when one person is acting on behalf of someone else. In the second case, you will be missing out on financial earnings that you could earn if you made a decision.

At this point we can all agree that sometimes, having too many choices can be crippling . Whether it be a choice of toothpaste  or  the  choice of financial investments, I propose that we keep things simple and approach it systematically.

To ensure that we are not paralyzed by having too many choices. Here is an easy systematic approach to deal with the problem:

  1. Figure out WHY you want what you want
  2. Go board (GB)- have one or two basic parameters for what you are trying to acquire. Don’t get bogged down with the details
  3. Repeat 2 until your choice is obvious

Let’s apply this process to our investment example.

WHY: I have to save for retirement. There are numerous options: stocks, bonds and real estate. In each category there are even more options. So the next step would be establish  two basic criteria for investing.

GB1:  The criteria may be as follows:  I am not very aggressive, but I do want some risk. Also, I don’t want to have to manage anything myself. These criteria eliminates real estate because you will have to be somewhat hands on. It eliminates government  bonds because you want to take some risk and it  eliminates very risky stocks and so we have narrowed  down the selection to medium risk stocks and corporate bonds.

GB2: Next criteria may be that we want to invest locally or in our region. This will narrow down the selection even more.

GB3: Then we determine which types of stocks and bonds to  invest in. Our preferences will be based on our lifestyle, our    economic status and our cultural background. These will  inform our decision as to which companies we want to invest in. At this stage you would have narrowed down the options significantly.

GB6: The final criteria may be to choose the companies which have had the best performance over the last ten years.

GB7: At this stage, our choice(s) becomes obvious.

made-my-decision

If this is new to you, I suggest you test it out on an everyday situation. You can test it out when trying to decide what to have for dinner. Your why will be hunger and the criteria might be either location or type of cuisine. Your hunger level will determine which takes precedent, somewhere close if you’re starving. If you are starving the closest place will be the obvious decision. We don’t have to be paralyzed when faced with many choices, the key is to know why and what it is you want. Once you can establish this, it narrows down your options and you are better able to make a decision that really works for you.

The next time you have to choose among many alternatives, try this approach and drop me a line and let me know how it worked for you.

Dr. M

http://www.thekidonomicsseries.com

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