Americans love alternatives. One of the benefits of modern capitalism, after all, is that we’re free to consume products that perfectly match our preferences – if you want to wear skinny jeans with a Black Sabbath t-shirt, flip flops and a fedora (I saw such a person yesterday – he looked very satisfied with himself) then go right ahead. Gail Collins, while bemoaning the difficulty of reforming the college loan system, summarizes the American obsession with choice:
This is why my corner drugstore offers, by my last count, 103 different kinds of body moisturizers. These are not, of course, to be confused with moisturizers for the face, hand, elbow or foot.
We, the informed shoppers, are supposed to scan the crowded shelves and decide whether our needs will best be met by body oil, body butter or firming emulsion. We will, perhaps, mull the “udder cream” whose big selling point is that it was originally developed for use on dairy cows. Then we select the products that will survive and thrive by voting with our pocketbooks.
Personally, I’m always most amazed by the shelves of floss. Only in America could we find a way to market more than 200 different types of waxed thread. (But would you like minty wax? Or wintergreen scented wax? Maybe you’d like to pay extra to have your thread coated in fluoride?)
Of course, we now know that more choice isn’t a universal good. Because the brain is a bounded machine – it can only process so much information at any given moment – people actually find excessive choice repellent. When we’re given too many options and no way of distinguishing between them – the different varieties of floss all seem equivalent – we experience a tremor of anxiety, the mild panic of supermarket uncertainty.
Sheena Iyengar, a psychologist at Columbia University, has done some incredibly interesting work on this subject. Consider her research on 401(k) plans, which looked at employee participation in plans covered by Vanguard, one of the largest mutual fund companies in the country. Iyengar found that, as the number of 401(k) plans increased, people became less likely to opt in. When there were only four different funds to choose from, nearly 75 percent of employees decided to participate. However, when people had to navigate fifty-nine different 401(k) options, only 60 percent of people decided to save for their retirement. In other words, excessive choice was repellent.
As Iyengar notes, these non-choosers probably intended to enroll in a 401(k). They probably took the hefty brochure home with them and planned on doing the relevant research. But then life got in the way and, before long, they’d forgotten to learn about the difference between a growth fund and a conservative fund.
Iyengar then looked at the slight majority of people who participated in the 401(k) plans even when there were fifty-nine different alternatives. Perhaps they made better decisions? Perhaps they were more satisfied with their choice? Alas, that wasn’t the case. Iyengar found that, for every set of ten additional fund options, 2.87 percent more of the participants avoided stocks completely. (This despite the fact that most of the additional funds included stock investments.) Overall, the 401(k) participants in the large choice condition allocated 3.28 percent less of their contributions to stocks, choosing to invest in bonds and money markets instead.
Why is this an irrational choice? A 401(k) is a long-term investment. Given such an extended time frame, it almost always makes sense to include some stocks or mutual funds, since those investments have historically outperformed bonds and money markets by a large margin.
The lesson here is that, in many circumstances, giving people more options has rapidly diminishing returns. When we can’t figure out the difference between our 401(k) options, or we’re too worried about choosing the wrong floss, we end up choosing to not choose at all. Which brings us back to the current student loan program, which is a classic example of useless choice (not to mention a waste of government money). Here’s Collins:
“We don’t hear students clamoring for choice in lenders. If anything, students and families need simplicity to understand the process and know how to navigate it,” said Edie Irons, communications director for the Project on Student Debt, a nonprofit dedicated to making college more affordable.
Since the government-guaranteed loans are regulated by Congress, they have virtually identical terms. The main variation comes in customer service: who has the best Web site or staff. Most current and former students do not seem to find this as being all that big a deal. What they need to know is exactly how much it will cost to pay back the loan after graduation, information about which they tend to hear less than the Web-site-quality matter. Besides, the loans often come in pieces, cobbled together from an array of different programs. It would be hard for an accountant to figure out what it all meant, and 19-year-olds are not at the point in life that maximizes attention to detail.