The other day I stumbled upon a man whom I found myself surprisingly attracted to. It took a minute before I realized what was appealing about him. Was it the salt and pepper hair? Maybe I found his wrinkled t-shirt alluring. The half calf socks were kind of doing it for me. Was it the way he tilted his head down to look over the glasses that rested at the tip of his nose?
Nope. I was digging the overall nerd package. I love a man that makes you think. Too bad Dr. Barry Schwartz is married.
But you’re not here to listen to me wax on and on about the sensual mannerisms of Dr. Schwartz. Although his lecture took place at a TED conference back in July 2005, the passage of four years won’t stop me from talking about a topic that is eternally relevant to human decision making, and, thus, your money.
According to Schwartz, modern, industrial societies operate on the premise that the best way to maximize the well-being of individuals is to maximize freedom: the freedom of choice.
Now who’d argue freedom is undesirable? Everyday I strive for a bit more freedom, a few more choices. Even if I ultimately decide to choose to stay exactly where I am, I shall forever pursue a lifestyle that’ll produce more options which will inherently result in more freedom.
The insatiable desire for complete freedom is, quite possibly, the only reason I’m frugal.
But Schwartz makes the case that a multitude of options have three negative effects on you.
Instead of liberation, paralysis overtakes you, and you refuse to make a decision.
It’s not the only reason, but one reason I haven’t restarted retirement investing is because I don’t want to make a bad decision. There are a lot of questions that need to be answered first.
- Do I want to pay taxes on my retirement contributions now or later?
- Should I contribute to both my 401(K) and IRA evenly throughout the year?
- Does it make sense to max out the IRA, then turn my attention towards the 401(K)?
- Would it be better to invest in a no fuss target date fund, or should I create my own portfolio of low cost funds?
- Under which circumstances are ETFs (Exchange Traded Funds) a more cost effective way to invest than index funds?
All of these questions require research and self reflection that I don’t want to make time for. And so, I do nothing. I let my savings peaceably flow into my ING account which is currently paying a dismal 1.30% annual interest rate.
Once you’re beyond the stage of inaction, and finally make a decision, you end up less satisfied with your choice than you would’ve been had fewer options been available.
I don’t doubt that any investment option I make is better than a long-term strategy of socking away money in a short-term savings account. But I’ve already indicated I’m afraid of making a bad decision. What I probably should’ve said is I’m afraid of making a decision that isn’t the best.
Instead of looking at whether my portfolio returns more than 1.30%, I’ll compare it to the highest performing investment vehicles available. Then I’ll try to fight off feelings of inadequacy and shame when I realize my returns are less than the best.
Your expectations escalate as you obtain greater access to more choices.
Although highly unlikely, what would happen if my portfolio outperformed all the rest. Would I be satisfied? Absolutely not, I’m never satisfied. I’d venture to guess that you’re never satisfied either. In a world with so many options, one has to be perfect.
Although Schwartz makes a compelling point for the limitation of choice, I still want more choices. At least then, I could choose to eliminate some of those choices.
What do you think? Do you have any examples of when you’d have been better off if you had fewer choices?