Cognitively Yours 1.16

 

Raja R, Author

"Choice is a burden as a result of a complex interaction among many psychological processes that permeate our culture"

The elections for some of the states have just been completed. Some of us might have cast our votes, exercised our choice and helped in formation of a new government. Choice is something we aspire for; in fact, as the number of available choices increases, the autonomy, control and liberation it brings to people are powerful and positive. However, when the number of choices grows further to the extent of choice overload, the negatives escalate until we become overloaded. From this point on, choice no longer liberates, but debilitates.

In his magnum opus Raghuvamsha, Kaalidasa, when the princess Indumati chose to reject a groom in her Svayamvara remarks

“Not that he was not lovable nor did she lack the power to appreciate (merits); but people have different tastes.” Raghuvamsha, Canto 6 verse 30.

Is choice just restricted to one’s taste and very simple to be wished away?

Choice is a burden as a result of a complex interaction among many psychological processes that permeate our culture. The reason why beyond a point too many choices means “more is less”. They include:

1. Rising Expectations: Our society is built around being, having and experiencing the very best. Accepting anything less is considered to be unacceptable. We choose a fund to invest amongst various alternatives, evaluating the possible risks and potential returns of various funds. We choose a fund and it provides us decent returns, much more than what we bargained for, at the time of investment. We should be happy about our choice. But, our happiness disappears once we realise that the alternatives which we rejected have performed better than what we chose to invest.

2. Opportunity Costs: The degree to which one passes up the opportunities that a different option would have afforded. This happens because the quality of any given option can not be assessed in isolation from its alternatives.

Example: An opportunity cost of investing in a sector oriented fund is not getting the benefits of diversification.

*Every choice one makes has opportunity costs associated with it.

3. Aversion to Trade-Offs: Being forced to confront trade-offs in making decisions makes people unhappy and indecisive. The emotional costs of trade-offs diminish our sense of satisfaction with a decision and interferes with the quality of decisions we make.

When we diversify our portfolio, we get the average of returns. This is the trade-0ff we get as against concentrated portfolio.

4. Adaptation: Simply put, humans get used to things and then they start to take them for granted. Because of adaptation, enthusiasm about positive experiences doesn’t sustain itself. And what’s worse, people seem generally unable to anticipate that this process of adaptation will take place.

The waning of pleasure or enjoyment over time always seems to come as an unpleasant surprise.

“Wonderful things are especially wonderful the first time they happen, but their wonderfulness wanes with repetition. Psychologists call this habituation, economists call it declining marginal utility and the rest of us call it marriage.”- Daniel Gilbert

5. Regret: There are two types of regret - anticipated and post-decision. Both types will raise the emotional stakes of decisions. Anticipated regret will make decisions harder to make, and post-decision regret will make them harder to enjoy.

Before deciding to invest, "What if the fund I chose to invest underperforms" rears its head even before the decision is made.  Post decision, we do have the "buyer's remorse", having second thoughts that the rejected alternatives could have been better than the chosen one or all the opportunities had not been explored before taking the decision. 

6. Self-Blame: If someone is responsible for an action that turns out badly, they will experience more regret than if things had turned out badly because of something or someone else.

Example: If you make an investment decision on your own, you will feel worse about your decision than if you had invested on the basis of advice from an investment advisor.

Many a time, we don’t put rejected options out of our minds, we experience the disappointment of having our satisfaction with decisions diluted by all the options we considered but did not choose.

How do we exercise our choices? Are we always rational in exercising our choices?

Let us start with a fundamental observation - most people do not know what they want unless they see it in context. We do not know what TV we want, the smart phone we want, the fund we want to invest; unless we see a TV, smart phone or a fund better than the previous one. Everything is relative. We are like an airplane landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels.

Dan Ariely explains this with an example - three offers from The Economist at a time. The first offer -  the Internet subscription for $59, print subscription for $125 and $125 a print and internet subscription. Who will like to buy the print-only subscription at the same price for print and internet subscription. It is anyone’s guess whether internet subscription for $59 is a better deal than $125 for print-only option at $125 but there will be unanimity that the print and internet option for $125 was better than the print-only option at $125. The decision between the internet only and print-only option needs a bit of thinking. Thinking is difficult and sometimes unpleasant. The Economist marketeers offered a no-brainer - relative to the print-only option, the price and internet option looks clearly superior.

Richard Thaler gave these three options to 100 students at MIT’s Sloan school of Management and they opted as follows: 1. Internet-only subscription for $59 - 16 students 2. Print-only subscription for $125 - None 3. Print and internet subscription for $125 - 84 students.

The choice looks smart and rational. They all saw the advantage of print and internet offer over the print-only offer. There were no takers for the “decoy” choice – Print-only option. Thaler removed the decoy choice gave the options to the students. Would the students respond as before (16 for the internet-only and 84 for the combo). Looks obvious, as Richard Thaler took the option which none selected. Au Contraire! During the second time, 68 students chose the Internet-only option for $59, up from 16 before, and only 32 chose the combo offer for $125, down from 84 before.

The presence of decoy choice enabled them to compare the comparable and the absence of the decoy choice made them choose differently. Thaler remarks “Not only irrational but predictably irrational”.

To sum up, Barry Schwartz suggests these to avoid regret and derive happiness from our choices. What we can do:

·   Choose When To Choose: To manage the problem of choice overload, focus your time and energy on choices which do matter. For eg: Do not spend much time on choosing an overnight fund, where the portfolio and returns are more or less the same across the funds.

·    Be a Chooser, Not a Picker: Whenever it matters, be a chooser - make an active choice - which option to choose, whether to reject all options or create a new choice - rather be a picker who makes passive selector of whatever available.

·    Satisfice More and Maximize Less: As Schwartz says “Aspire for good enough rather than chase the very best.”

·   Think About the Opportunity Costs of Opportunity Costs: When we invest in a fund to beat the inflation, be satisfied if your objective is satisfied and your investment has done fairly well relative to peers. There is no obvious absolute standard that we can appeal to.

·   Make Your Decisions Non-reversible: Investing through Systematic Investment Plans ensures pre-commitment and to some extent non-reversible as against investment on your own at frequent intervals.

·   Practice “Attitude of Gratitude”: Success is achieving what you want and happiness is wanting what you achieve. Focus on what good has happened due to your choice rather than what has not happened.

·   Regret Less: Rather than brood over each particular decision which has gone wrong, focus holistically on the portfolio returns to avoid regret.

·   Anticipate Adaptation: The thrill and happiness which we derive from making investment decisions and enhancing our wealth, will be not the same, once we achieve our objective. Be satisfied of how good things actually are instead of focusing on how they’re now less good than they were at first.

·   Control Expectations: This can be done by reducing the number of options chosen. The likely regret we have in choosing an actively managed equity fund to realise that it has not performed well as compared to peers in future, could be nullified by investing in a passively managed fund where the performance equals the expectation and can be construed as an example of serendipity.

·   Curtail Social Comparison: Focus on your objectives and whether your objectives have been fulfilled. Stop paying attention to what others are doing.

·   Learn to Love Constraints: Learn to live with constraints, as some of the limits we place could be liberating rather constraining. By deciding once to have a committed investment plan, we avoid having to make a deliberate decision again and again.

References: Predictably irrational by Dan Ariely, The Paradox of Choice - Why more is less by Barry Schwartz

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