It’s easy to over-analyze financial decisions. One of the by-products of over thinking is under doing. Since you have to do something in order to achieve something, trying to make perfect choices can have a detrimental impact on your long-term financial well-being. “Analysis Paralysis” is real.
More is Less
Having choices is good, but too many choices usually ends up not so good. This is because of what is known as the “choice paradox”. Psychologist Barry Schwartz wrote an excellent book on this topic several years ago titled The Paradox of Choice: Why More is Less. I highly recommend it for some understanding of decision-making and choices.
Think about the grocery store that you frequent. Chances are, the store carries hundreds of varieties of cereals, salad dressings, yogurts and cheese. While we like the idea of having such a large variety, the number can overwhelm and make decisions much more difficult. On some level, I suspect most of us realize this difficulty. What we may not fully comprehend, however, is that any disappointment with the choices we actually make translates into a form of self-blame. With all those choices, how could we have ended up with a style/flavor/brand of yogurt that we didn’t like? The number of choices has created an expectation of perfection.
Too Many Choices
To move this over to the financial world, let’s consider some of the research done on retirement plan choices. Many company retirement plans (401(k)’s), still believe more choices are better. We have seen corporate retirement plans with literally hundreds of fund options (flash back to the number of cereals at the grocery store). Research has shown that beyond a few choices (10), participation rates decline by about 2% for each additional grouping of ten choices. For many, the difficulty of making a choice, any choice, is so extreme that they just opt-out and don’t participate (and likely forgo the employer match).
A large part of our role, our value, surrounds changing the way clients approach financial decisions. It isn’t constructive to constantly be on the prowl for “the perfect investment”. It is likely only “perfect” for a fleeting moment or two. To move towards our real life financial goals, we need to make choices that are good for us and make adjustments when needed. Ready for a real conversation?