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Spoilt for choice

It feels like every second ad we see espouses the virtues of choice. We’ve become conditioned to believe that choice is always a good thing and that the more choice we have, the better it is. This is just not true. There’s a common...

4 February 2018 · 10x

Spoilt for choice

It feels like every second ad we see espouses the virtues of choice. We’ve become conditioned to believe that choice is always a good thing and that the more choice we have, the better it is. This is just not true.

There’s a common sense truth to this argument, though we seldom stop to consider it. The problem with choice is that, after we’ve made one, we think about what we could have had, and wonder if it would have been better.

We could have had the steak instead of the fish, or gone to that restaurant instead of this one. We could have holidayed somewhere else, married someone else, married later or not married at all. Always thinking about what might have been, we’re never really content with what is. It’s endless Fomo (Fear Of Missing Out).

Psychologist, Professor Barry Schwartz, who wrote The Paradox of Choice and whose TED Talk of the same title has had more than 10 million views, explains that what greater choice does is increase our expectations. And with more expectation there’s usually less satisfaction, because it’s harder for the real thing to attain what we hoped it would. If there were just vanilla ice cream, we wouldn’t worry that all the other flavours might taste better, and we wouldn’t be unhappy with vanilla.

You choose, you lose

When it comes to investments, the industry likens different funds to different ice cream flavours, essentially saying there are different strokes for different folks, and that fund A is more suitable to this person, and fund B is better for that one.

At 10X we don’t buy it. We have one, single group of funds that follow one, single strategy. We believe it’s the best strategy, a strategy that works for everyone. We believe this because we’ve tested and back-tested it over more than 100 years – and it’s worked without fail. If we offered a choice, one of those options would have to be a second-best.

Why don’t other investment companies just offer their best strategies or funds? Because they don’t know which one it is. Their best performer one year will not the best performer every year. But they do know that if they have 40 or 50 options, one of those options will probably be near the top each year, and that is all they need to market themselves.

Where does that leave Joe Public? In South Africa there are more than 1,500 unit trust options alone. How do average investors know which one to pick? How do seasoned fund managers know which to pick? It’s dizzying.

This is the other problem with choice, as Prof Schwartz observes. More choice means more complexity. While the ads make us believe that choice gives us freedom, and that it’s liberating, in fact it’s paralysing.

In one study, customers were offered a discount coupon for jam. There were two jam displays. One had only six jams – and 30% of people bought a jar. The other had 24 jams – only 3% bought a jar from the bigger display.

You choose, you lose

In the scheme of things, ice creams and jams are of no great consequence, but investments are, and the same principle applies. Schwartz tells of a company’s voluntary retirement plan that gave employees a choice of 156 different funds. There was a great incentive for employees to choose one of those funds because the company would match their contribution. But choosing from 156 options is mindboggling – so employees just didn’t choose. Schwartz noted that for every additional 10 options offered, 2% fewer people participated. That would mean 30% fewer people participating in this particular organisation, each giving up as much as R65,000 a year in company contributions to their pension.

Even when there’s a really good reason to act – for example, because it affects our retirement – we are paralysed by too much choice. Too much choice makes us feel even more ignorant about already complicated products. We become even more alienated from how they work and what they’re supposed to do. We are even more reliant on “experts” like advisors, who make a very good living off our money. And we engage with our own retirement savings even less.

All of which serves the investment companies very well. But investors, like you and me, not so much.

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