Investor's Psychology

The Paradox of Choice: Freedom is a Lie

Created on 24 Aug 2022

Wraps up in 5 Min

Read by 4.2k people

Updated on 13 Sep 2023

“We can’t know when we make a choice whether it will be successful. Success emerges from the quality of the decisions we make and the quantity of luck we receive. We can’t control luck. But we can control the way we make choices.”

The paradox of choice is our difficulty in selecting when confronted with many alternatives, despite our preference for having many options. The greater the selection, the more difficult the decision and the less delighted you will be with it. This dilemma occurs when selecting A over B, C, and D due to the probable loss of alternatives (B, C, and D). The paradox of choice can be experienced when feeling buyer's remorse, selecting an academic subject, or even finding a romantic partner. 

The majority of individuals did not have much flexibility to make purchase decisions in the past. We ended up mass-producing goods, limiting people's options as a result of industrialisation.

Now that we have the freedom to choose from multiple products, the decision-making process requires significantly more time and effort, offsetting the newly gained freedom. This is why it is referred to as the paradox of choice, sometimes known as the choice paradox. Well, I hope you understand the meaning of the paradox of choice, and to know more, keep reading!

The Paradox of Choice Illustrations 

Too many options can overwhelm, but just the right amount will stimulate sales. 

In a well-known study done at Columbia University, a team of researchers set up a booth with samples of jam. They would transition from a selection of 24 jams to a group of six jams every few hours. 60% of people would stop to try a sample of 24 different jams, and 3% of these shoppers would purchase a jar. When six jams were displayed, just forty per cent of people stopped. But here's the intriguing part: thirty per cent of these individuals purchased jam. In other words, numerous alternatives enticed clients to explore, but fewer options persuaded them to purchase. 

What are the primary characteristics of choice overload? 

When individuals are faced with many alternatives to any object, whether for purchase or otherwise, they experience the inability to choose more strongly. This difficulty is observed in the following ways:

  • When offered additional alternatives, individuals often have a more difficult time picking.

  • Due to their difficulty selecting, individuals are more likely to be disappointed with their selection or to regret the purchase.

  • Having additional options increases both interest and expectations. These expectations appear to diminish when a choice is made from a larger number of options as opposed to a smaller number of options.

  • Some customers are satisfied (they settle for something adequate), while others are maximisers (they must pick the best of the lot or the best of the best). 

  • Researchers discovered that a greater number of alternatives for some high-stakes decisions, such as health insurance, reduced the number of individuals engaged in the programs. 

  • The never-ending chore of making judgments on large and minor matters consumes time and mental energy, overwhelming our senses and even causing us to feel nervous or unhappy. 

Why it's so difficult to make (excellent) choices 

There are several reasons why it is difficult to make judgments, particularly excellent, quick ones. A few of these reasons are: 

  • There are several challenging steps in the decision-making process, such as obtaining information and setting objectives; difficulty with any of these steps might either halt the entire decision-making process or hinder it in some other manner. 

  • People experience "decision fatigue", where having to make frequent decisions makes every additional decision more taxing on a person's cognitive resources. This phenomenon occurs because decision-making is an intrinsically taxing process, and people need to mentally refuel before making additional choices.

  • Uncertainty or a vast number of accessible alternatives can make it difficult to decide, as associated factors such as the fear of missing out cannot be measured quantifiably to make comparisons among alternatives difficult.

  • Cognitive biases can also hinder decision-making and frequently cause individuals to make poor choices. 

  • Certain psychological qualities, such as perfectionism, are linked to indecision, and some individuals are indecisive by nature.

Numerous factors contribute to the difficulty of making (good) decisions, including the complexity of the decision-making process, the cognitive work associated with decision-making, difficulties such as uncertainty, the fear of missing out, and various cognitive biases. These cognitive biases are discussed in depth in various blogs.

How to Avoid the Choice Paradox

To avoid the paradox of choice, you must restrict the number of available possibilities. Although it is easier said than done, some strategies can assist you to achieve this. 

The easiest strategy to alleviate the paradox of choice if you're a novice investor is to combine your selections. In other words, you select a large number of options based on specific criteria and group them together. This greatly decreases the remaining number of alternatives without truly eliminating anything.

For example, ETFs select hundreds of equities, such as the whole S&P 500 index, and combine them into a single asset. Therefore, you can purchase the ETF to have instant diversification as an investor. 

The second way to lessen the paradox of choice is to begin with fields that you already know. Therefore, if you wish to select particular stocks or assets, you should begin with something you are comfortable with. This might be an industry, a product category, or even an economy. This is because the more you know about this business or industry, the simpler it will be for you to make an informed selection without getting overwhelmed with alternatives. 

However, if you solely focus on what you already know, you will acquire a home-country bias and overexposure in your area of knowledge. Thus, most of your holdings will be affected when circumstances deteriorate there. To offset this, it may be advantageous to purchase additional securities to cover various industries or global locations. Thus, you may diversify your portfolio while still having fun and selecting your own stocks. 

The Bottom Line

The illusion of choice is a potent weapon for manipulating and controlling individuals. When making judgments, it is essential to be mindful of your own biases and habits. Before making a decision, carefully explore all available alternatives. Consider the possible risks and expenses connected with your decisions. Before making a final choice, seek out other perspectives. When making judgments, follow your intuition and gut instincts.

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Deb P Samaddar

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If people could be named after idioms, Deb would be called "I'm all ears." His brain is a storehouse, ever overflowing with derelict information. So, while most things he talks about are as useless as occasion-less greeting cards, everything he writes has the potential of bagging you multiple diplomas!

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