The Tyranny of Choice: Why You Feel Overwhelmed by Money
Why 34% of workers with low financial knowledge don't save for retirement
In 2019 my wife and I went to the Cheesecake Factory for the first time.
The menu was more than 20 pages long and had 250 dishes.
It wasn’t a problem for me because I always order a Greek Salad with grilled chicken whenever it’s an option (I have very basic tastes.) But this 250-dish menu created problems for my wife — who enjoys trying something new whenever possible. She was overwhelmed by the choice. She consulted our server on over half a dozen options and had to flag down our server after placing her order because she changed her mind.
The Cheesecake Factory’s sprawling menu is a classic example of what psychologists call ‘Choice overload.’ It’s that feeling when you have so many options to choose from that your brain gets overwhelmed, causing decision-making to become a Herculean task.
The Cheesecake Factory menu is a textbook example of what psychologists call “Choice overload,” which describes how people get overwhelmed when presented with too many options.
The effects of choice overload extend well beyond your lunch order. In this article, I explain how choice overload impacts your finances and how you can avoid analysis paralysis on important financial decisions.
Choice overload and your money
If too many options overwhelm us with a decision as trivial as what to order for dinner, imagine how it feels when a hundred different options for saving and investing for retirement are dumped into your lap — often with little guidance.
A 2012 study found that having too many investment options in a workplace retirement plan caused 34% of workers with low financial knowledge not to participate in the plan, compared to only 11% of workers with high financial knowledge.
Picture this: You have never thought about investing, and then one day, your employer hands you a list of 50 different investment options, emphasizes that your decision will have massive implications for your life in retirement, and leaves you on your own to decide which investment is right for you.
That’s choice overload.
It’s easy to understand how this leads to inaction.
You know the decision of how to invest is critical. At the same time, you are fully aware of the limitations of your financial knowledge. So, not wanting to make the wrong decision, you delay making any decision until you feel prepared. Then the day-to-day demands of life pull your attention onto other issues, and you continue to put off making any decision.
In this example, fear of making a bad decision led to the worst decision of all; to do nothing. Even a lousy investment in a workplace retirement plan is better than saving nothing. This is especially true when your employer matches your contributions, which is free money.
Just in time, financial education
Arming yourself with financial education can help you more easily cut through the notice and pick out an investment that helps you reach your goals.
But, as with all things in life, when it comes to financial education, timing is everything. The best time to brush up on your financial knowledge is before you make an important financial decision.
If you get an email from HR telling you that next Thursday at 10:30 AM, you need to decide about participating in the workplace retirement plan, now would be a fantastic time to brush up on your investment knowledge.
To confidently choose an investment fun to put your money in, you’ll need a high-level understanding, general knowledge, and a few specific points of what to look for in an investment.
High-level understanding: The difference between stocks and bonds and how much you should invest in each.
General knowledge: The difference between mutual funds, ETFs, and active vs. passive investing.
Specific points: How investment fees work, how and when to rebalance a portfolio.
If you have all three levels of investment knowledge, you’ll know enough to ask the right questions and feel confident in deciding how to invest your retirement savings.
As I’ve written, it’s best to learn about money before making an important financial decision.
People forget what they learn at an astonishingly fast rate. Researchers from the University of Waterloo found that students forget over half of what they learned in a 1-hour lecture within 24 hours.
So, if you read a book teaching you the basics of investing a year ago, you will have forgotten many important details by now.
But the brilliant thing about a book is that it’s always available to return to. Re-reading the book in the days leading up to your decision about participating in your workplace retirement plan can keep the important information in your head and give you the confidence to cut through the noise and make a decision.
The same goes for any financial decision, from choosing the right mortgage to deciding how much life insurance you need to buy; some advanced research done right before you need to make a final decision can help you avoid choice overload.
One of the most frustrating aspects of teaching yourself about money is knowing where to start and what information is trustworthy.
I want to help you with that.
If you’re struggling with an important financial decision, tell me about it in the Making of a Millionaire Chat. If you provide some background on the financial decision you need to make, I can give you some resources and point you in the right direction.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
This is so true. I often feel that our industry is happy to make things as complicated as possible so people are forced to feel like they cannot invest and save on their own. YOU CAN! You can educate yourself and make the choices you need to for success!