Investment Decision Making: Do Experienced Decision Makers Fall Prey to the Paradox of Choice?

Psychology research suggests that decision makers fall prey to the paradox of choice phenomenon, where individuals are less likely to make a decision when faced with an extensive choice set than when faced with a limited choice set. This research may have important implications for investment decision makers in circumstances in which many investment options are available. However, the studies in psychology have typically examined the decisions of individuals who have no particular experience in the decision task. In this study, we examine whether individuals' investment decisions are affected by choice-set size (i.e., a limited vs. extensive choice set) and whether the effect is mitigated or changed for individuals who are more experienced with investment decisions. We find that the paradox of choice phenomenon is evident for participants who are less experienced with investing but not for more experienced participants. In fact, individuals who are more experienced with investment decisions were actually less likely to invest when faced with a limited choice set, contrary to the paradox of choice phenomenon. These findings suggest that the paradox of choice may not exist when individuals with investment experience make their decisions.

[1]  B. Fischhoff,et al.  Judgment and decision making. , 2012, Wiley interdisciplinary reviews. Cognitive science.

[2]  David J. Weiss,et al.  Human Cognitive Capabilities, Representativeness, and Ground Rules for Research , 2008 .

[3]  John R. Nofsinger,et al.  Trading Performance, Disposition Effect, Overconfidence, Representativeness Bias, and Experience of Emerging Market Investors , 2007 .

[4]  K. Becker,et al.  How much choice is too much , 2006 .

[5]  B. Schwartz.  Freedom, Choice, Wealth and Welfare , 2005 .

[6]  Reid Hastie,et al.  Explanations determine the impact of information on financial investment judgments , 2005 .

[7]  A. Kempf,et al.  Status Quo Bias and the Number of Alternatives: An Empirical Illustration from the Mutual Fund Industry , 2005 .

[8]  B. Schwartz.  The Paradox of Choice: Why More Is Less , 2004 .

[9]  Julie R. Agnew,et al.  Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice and Investor Experience , 2004 .

[10]  B. Schwartz.  A Nation Of Second Guesses , 2004 .

[11]  A. Chernev.  When More Is Less and Less Is More: the Role of Ideal Point Availability and Assortment in Consumer Choice This Research Argues That Choices from Different Size Assort- Ments Are a Function of the Degree to Which Consumers Have , 2022 .

[12]  A. Chernev.  Product Assortment and Individual Decision Processes , 2003, Journal of personality and social psychology.

[13]  Stephen Utkus,et al.  Can There Be Too Much Choice In a Retirement Savings Plan ? , 2003 .

[14]  Gur Huberman,et al.  How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans , 2003 .

[15]  Kimberly K. Moreno,et al.  The impact of affective information on the professional judgments of more experienced and less experienced auditors , 2002 .

[16]  M. Lepper,et al.  The Construction of Preference: When Choice Is Demotivating: Can One Desire Too Much of a Good Thing? , 2006 .

[17]  Jennifer Gregan-Paxton,et al.  How do investors make predictions? Insights from analogical reasoning research , 2000 .

[18]  I. Simonson,et al.  The effect of product assortment on buyer preferences 4 4 The paper has benefited from the comments , 1999 .

[19]  Sandra Waller Shelton,et al.  The Effect of Experience on the Use of Irrelevant Evidence in Auditor Judgment , 1999 .

[20]  B. Kahn,et al.  Variety for sale: Mass customization or mass confusion? , 1998 .

[21]  R. Dhar.  Consumer Preference for a No-Choice Option , 1997 .

[22]  Vicky B. Hoffman,et al.  Accountability, the dilution effect, and conservatism in auditors' fraud judgments , 1997 .

[23]  Steven M. Glover.  The influence of time pressure and accountability on auditors' processing of nondiagnostic information , 1997 .

[24]  D. Lehmann,et al.  Reasons for Substantial Delay in Consumer Decision Making , 1995 .

[25]  Karl E. Hackenbrack.  Implications Of Seemingly Irrelevant Evidence In Audit Judgment , 1992 .

[26]  Thomas Kida,et al.  Heuristics and biases: Expertise and task realism in auditing. , 1991 .

[27]  B. Kahn,et al.  Modeling choice among assortments. , 1991 .

[28]  K. Lancaster.  The Economics of Product Variety: A Survey , 1990 .

[29]  B. Wernerfelt,et al.  An Evaluation Cost Model of Consideration Sets , 1990 .

[30]  Terry L. Campbell,et al.  THE EFFECTS OF INFORMATION ORDER AND HYPOTHESIS-TESTING STRATEGIES ON AUDITORS' JUDGMENTS. , 1989 .

[31]  Ken T. Trotman,et al.  THE EFFECT OF HYPOTHESIS FRAMING: PRIOR EXPECTATIONS AND CUE DIAGNOSTICITY ON AUDITORS'... , 1989 .

[32]  Brenda H. Anderson.  An examination of factors affecting auditors' hypothesis testing strategies , 1989 .

[33]  R. Glaser,et al.  Expertise in a complex skill: Diagnosing x-ray pictures. , 1988 .

[34]  J. W. Hutchinson,et al.  Dimensions of Consumer Expertise , 1987 .

[35]  D. Funder,et al.  Errors and mistakes: evaluating the accuracy of social judgment. , 1987, Psychological bulletin.

[36]  R. Skov,et al.  Information-gathering processes: Diagnosticity, hypothesis-confirmatory strategies, and perceived hypothesis confirmation. , 1986 .

[37]  Thomas Kida,et al.  The Impact of Hypothesis-Testing Strategies on Auditors' Use of Judgment Data , 1984 .

[38]  D. A. Kenny,et al.  Processing inconsistent social information. , 1983 .

[39]  D. Berkeley,et al.  Structuring decision problems and the ‘bias heuristic’ , 1982 .

[40]  Ward Edwards,et al.  Judgment under uncertainty: Conservatism in human information processing , 1982 .

[41]  N. Malhotra.  Information Load and Consumer Decision Making , 1982 .

[42]  A. Tversky,et al.  Judgment under Uncertainty , 1982 .

[43]  B. Fischhoff,et al.  Judgment under uncertainty: Debiasing , 1982 .

[44]  R. Hogarth.  Beyond discrete biases: Functional and dysfunctional aspects of judgmental heuristics. , 1981 .

[45]  R. Nisbett,et al.  The dilution effect: Nondiagnostic information weakens the implications of diagnostic information , 1981, Cognitive Psychology.

[46]  Claudia E. Cohen,et al.  Person categories and social perception: Testing some boundaries of the processing effect of prior knowledge. , 1981 .

[47]  S. Gangestad,et al.  Hypothesis-testing processes , 1981 .

[48]  Mark Snyder,et al.  Seek, and ye shall find: Testing hypotheses about other people: The Ontario Symposium , 1981 .

[49]  Mark Snyder,et al.  Testing Hypotheses about Other People , 1980 .

[50]  Steven M. Shugan.  The Cost Of Thinking , 1980 .

[51]  Mark Snyder,et al.  Testing hypotheses about other people: The use of historical knowledge , 1979 .

[52]  Mark Snyder,et al.  Behavioral confirmation in social interaction: From social perception to social reality. , 1978 .

[53]  D. Scammon.  "Information Load" and Consumers , 1977 .

[54]  Hillel J. Einhorn,et al.  A Synthesis: Accounting and Behavioral Science , 1976 .

[55]  A. H. Murphy,et al.  Probability Forecasts: A Survey of National Weather Service Forecasters , 1974 .

[56]  A. Tversky,et al.  Judgment under Uncertainty: Heuristics and Biases , 1974, Science.

[57]  J. Jacoby,et al.  Brand Choice Behavior as a Function of Information Load , 1974 .

[58]  A. Tversky,et al.  On the psychology of prediction , 1973 .

[59]  A. Tversky,et al.  Subjective Probability: A Judgment of Representativeness , 1972 .

[60]  W. Edwards,et al.  Conservatism in a simple probability inference task. , 1966, Journal of experimental psychology.

[61]  Ward Edwards,et al.  Conservatism in Complex Probabilistic Inference , 1966 .