Simple Steps to Overcome Information Overload

John Bajkowski President, AAII
John Bajkowski

President, AAII

I have always thought it best to have many choices when buying something, selecting a mutual fund, or even making a decision. But as Charles Duhigg points out in his latest book, “Smarter Faster Better: The Secrets of Being Productive in Life and Business,” when people are faced with too much information they simply shut down because they don’t know what to do with the information. Often we start to ignore options, we make bad decisions because we cannot face the need to consider the many alternatives, or we reach a breaking point and completely walk away from the decision.

Whether you call it information overload, sensory overload, or information blindness, Duhigg is referring to our inability to take advantage of information as it becomes more plentiful.

Duhigg cites the results of an interesting study in a chapter of the book that deals with absorbing data. In a 2003 paper titled “How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans,” Sheena S. Iyengar, Wei Jiang and Gur Huberman found that the percentage of employees participating in their corporate 401(k) plans is higher in plans offering only a handful of funds from which to select, as compared to plans offering ten or more options. These self-directed pension plans are critical tools for building up retirement savings. Employers are responsible for establishing the plans, but employees typically determine the percentage of their paycheck to contribute to their plan and which specific investments to select. Employees can be faced with deciding whether to invest their money in company stock, individual stocks and mutual funds, insurance products, as well bank instruments.

Psychologists believed that having choices empowered people’s sense of control, increased motivation to act, and improved life satisfaction.  However, it has been shown that while having extensive choices initially proves to be more enticing than limited choices, those exposed to limited choices were more likely to engage and make selections. People become frustrated with a complex decision-making process. The responsibility of making a more complex decision starts to weigh on people, so many become unwilling to make a choice. The fear of making a “wrong choice” grows even stronger if it’s felt that the cost or penalty of making the wrong choice is high and if a significant amount of time or effort will have to be exercised to make the right choice. The more you think you need to be an expert to make a decision, the more likely you are to put off the decision.

Iyengar, Jiang and Huberman studied the 401(k) participation rate of nearly 900,000 employees enrolled in 647 plans administered by Vanguard Group. What they observed was that the greatest participation rate–75%–occurred when only two fund options offered. When employees were free to select among 59 funds, the participation rate dropped to around 60%. The majority of plans offered between 10 and 30 options, but plans with fewer than ten options had significantly higher participation rates.

The Relationship Between Participation and Number of Funds Offered
The Relationship Between Participation and Number of Funds Offered: “How Much Choice is Too Much?: Contribution to 401(k) Retirement Plans,” Pension Research Council of the Wharton School of the University of Pennsylvania

The notion of freezing when faced with a decision is not a new concept. In the parable of the donkey (Buridan’s Ass Paradox), the donkey starves to death from indecision when faced with the choice of two equally attractive and equal-distant hay bales. Buridan’s Ass is named after a French medieval cleric and scientist, even though forms of the parable go back further in time. Aristotle wrote “a man, being just as hungry as thirsty, and placed in between food and drink, must necessarily remain where he is and starve to death” in On the Heavens.

So how can we break out of the trap of information blindness? When faced with many options, we need to establish a framework so that we are making a series of simple choices. Duhigg describes how we train ourselves to look through an extensive wine list. Rather than putting the wine list down and sticking with water, we typically start out by narrowing the choice between red or white, then by region, then price range, etc. Humans are good at absorbing data as long as we can break it down into digestible chunks. Our brains want to reduce our choices into two or three options at a time. When faced with more, we should try to organize the choices into as many simple layers as possible.

Think of the value of a stock screen that quickly winnows a universe of over 6,000 publically trading stocks into a handful of names with a few simple criteria such as maximum desired price-earnings ratio, minimum return-on-equity ratio, minimum earnings growth and maximum level of debt-to-equity.

Looking to invest in a mutual fund? A series of questions such as load or no-load, passive (index fund) or active management, equity or bond focus, domestic or foreign holdings, large or small cap, high or low expense ratio, and performance relative to category can help you select a fund.

Remember that the quality of our decisions generally gets better as long we receive additional relevant data and understand how to organize our decision-making process. If you feel yourself starting to ignore relevant data, pause and examine if you are falling into the trap of information blindness. At a minimum, you will have the confidence to walk into a Baskin-Robins and place an intelligent ice cream order.


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