Faced with selecting one of two options we have a 50 per cent chance of being right – or wrong. Expand the options to five, however, and our chance of being right is reduced to 20 per cent. Add even more options and the chances of making a wrong decision multiply. This is the choice paradox: where a multiplicity of choices may be considered a blessing, it can also turn out to be a curse.
Many experiments have been run to prove how self-defeating too much choice can be. A famous one was carried out by psychologists Sheena Iyengar of Columbia University and Mark Lepper of Stanford University (both USA): it is known as ‘the chocolate test’.
The experiment, one of two, is written up in fascinating detail in the Harvard Business Review (June 2006). The test was conducted among 200 Stanford University students; it indicated that having a selection of 24 chocolates from which to choose was far less satisfying or effective than having a limited selection of just six.
To quote excerpts from Iyengar and Lepper: “Our findings demonstrate that the offer of overtly extensive choices in relatively trivial choice-making contexts can have significant demotivating effects … the phenomenon of choice overload … may be further exacerbated in other contexts such as making investment decisions.”
Consider this: the Australian Stock Exchange comprises around 2,200 listings from which an investor may select. Let’s now expand that range to include global industry category standards (GICS) comprising 10 sectors aggregated from 24 industry groups, 67 industries, and 147 sub-industries covering over 27,000 companies globally.
We are now deeper into the choice paradox and seemingly a long way from chocolates; anyone serious about investing (and who isn’t?) will recognise the challenge: “What solutions are out there?”
There’s one in particular that might be worthy of consideration: the managed account, where security selection is done by professionals using thorough research and rigorous process in search of value. Joseph Palmer & Sons provide such accounts in two different formats, each designed to suit investors with different outlooks.
For those wanting an advice-related service Palmer’s Managed Discretionary Account (MDA) is worth close examination; those preferring a more ‘set and forget’ approach might find the Separately Manage Account (SMA) more appealing.
Disclaimer & General Advice Warning
This publication has been prepared by Joseph Palmer & Sons (ABN 29 548 490 818) an Australian Financial Services Licensee (AFSL 247067). Whilst the information contained in this publication has been prepared with all reasonable care from sources, which Joseph Palmer & Sons believes are reliable, no responsibility or liability is accepted by Joseph Palmer & Sons for any errors or omissions or misstatements however caused. Any opinions, forecasts or recommendations reflects the judgment and assumptions of Joseph Palmer & Sons as at the date of publication and may change without notice. Joseph Palmer & Sons, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any securities recommendation contained in this publication is unsolicited general information only. Joseph Palmer & Sons are not aware that any recipient intends to rely on this publication and are not aware of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors must obtain individual financial advice from their investment advisor to determine whether recommendations contained in this publication are appropriate to their personal investment objectives, financial situation or particular needs before acting on any such recommendations.