Financial Vertigo: Making Better Choices with Fewer Options

I woke up this morning dizzy. No big deal, I told myself, it’ll pass. Well, it didn’t. I wasn’t fainting or falling over but it was definitely presenting a problem. After a trip to the medical clinic, the good doctor did his thing and diagnosed me with vertigo. He explained it had something to do with crystals in my inner ear sending mixed up messages to my brain – hence the dizziness. Here’s what I took away from that discussion:

My brain oversimplified and chose the wrong information to pay attention too.

At the end of the appointment, the doc shared some exercises and gave me a prescription for when it happens again. No harm. No foul. But, it did get me thinking. ..

We live in a world founded on freedom. And freedom is defined, in part, by our right to choose. Choosing is important in a lot of situations. Choosing who you want to spend the rest of your life is important. Choosing which of the fifteen brands of Head and Shoulders Shampoo to use is not.

This world is very different from the one that 90,000 years of evolution prepared us for – we are inundated with facts, figures, ideas, proposals, and plans all the time. Our minds are overloaded and overwhelmed with the choices we make every day. We’re not designed to take in, process, and act on this much information at one time. It’s enough to make you dizzy. How is making better choices possible with all this going on?

We need to be strategic about our choices. But it’s hard to do that with there’s so much being thrown at us all the time. Oh great, you say, now I’m asking you to make choices about making choices? Is your head spinning yet?

Barry Schwartz, author of Paradox of Choice, talks about this issue and sheds light on how we can do this effectively.  He points out in his Google Techtalk presentation that people believe there are just too many choices out there. Cell phones, laptops, utilities, and clothes – sometimes there’s just too much of a good thing.

In another example, a Decide Infographic, shares that a new TV is released every 15 hours; a new laptop every four hours; and a camera every 45 hours. With ‘New and Improved!’ and ‘Bigger and Better!’ coming at us every few hours, it’s no wonder why we freeze.

Unfortunately, this paralysis isn’t limited to small things like which gum to buy. A study conducted by Sheena Iyengar shows that the number of mutual fund products offered in a retirement plan program effects participation. Over a million Americans involved in 650 retirement plans were followed to discover how they chose their retirement plan investment products.  Iyengar found that for every ten mutual fund products offered, participation in the employer-matching retirement plan dropped by 2%. This has huge implications for people’s futures – hundreds of thousands of dollars are lost because people felt too overwhelmed to make a choice.

Photo Credit: Ted Talks/Sheena Iyengar

When people are a forced to make a difficult choice, they will often resort to using simplified strategies to make the choice “makeable”.  For instance, employees from the study chose their mutual fund products by defaulting on the easy “money market” funds that yielded a half percent interest a year. As Schwartz would say, “put [the money] in the bank and decide tomorrow.” It’s just easier to figure it out later.

Iyengar points out that our brains just can’t do the math, there’s simply too much comparing and contrasting for people to wrap their heads around. We give up and opt out. Making better choices do not come from having fifty options to “choose” from.

It looks like my brain has a double chin….

Strategies for Making Better Choices:

A Business Insider article breaks down Iyengar’s talk and shares some ideas for choosing well in a choose-happy world.

1. Make decisions real and concrete:

Keep the consequences real and in the moment. Iyengar gives the example of keeping money in your wallet and then spend using cash instead of your debit card, making each purchase and consequences more real.

For me, it’s downloading my expenses every week into Quicken and publishing it on my blog. The thought of having to post embarrassing numbers keeps it real for me in a way that other methods do not.  Find a way that works for you and go with it.

 2. Focus on positive and specific outcomes:

Iyengar shared that in a session for 401(k) enrollment, participation rose by 20% and the amounts contributee by 4%.  She said that thinking positively about the good choices participants were making for their future helped them feel more optimistic.

When we are making financial choices for ourselves, we need to keep it based in a concrete area of our life. For instance, I want to be able to travel, get my personal pilot’s license, and buy a horse so I can ride regularly. These are REALLY expensive goals and hobbies. By plotting out an aggressive debt repayment plan and furthering education that will double my salary, I will be able to do all these things and continue investing and making money on my terms. Positive thoughts, good choices, and a well-executed plan in a concrete area of my life equals awesome.

 3. Categorize Choices:

Iyengar points out that consumers reported having a better “choosing experience” if there are six hundred magazines grouped into four categories over four hundred magazines grouped into twenty categories. Why? Because twenty is just way too much. Our brains hate this and will become overwhelmed. How does this translate for you as the consumer?

Prioritize. If you’re trying to choose between sixteen different brands of canned diced tomatoes – what’s going to be your deciding factor? If you’re money conscious – maybe price is your determinant. Or if you’re health conscious – the low sodium option may appeal to you the most. Or maybe who cares and you just pick what’s in front of you.

It can go on and on with options so knowing what’s most important to you will help you categorize your choices appropriately. Doing your research to refine those priorities further will serve you in almost any area of your life. But, knowing what you’re not going to worry about is just as valuable; letting go of things you just can’t control or make time for will ease any second-thought anxiety you might have.

 4. “Conditioning for Complexity”

Iyengar shares that we can work our brains up to dealing with more choices. She uses the example of choosing options for a car to demonstrate this idea. According to her Ted Talk, there are sixty decisions that need to be made when someone chooses a car. However this process is structured as “build-up” method that helps the brain work into handling an increasing number of choices. In other words, you start with few choices and then gradually build up to more and more choices. Choose between manual and automatic transmission, then between three engine choices, then between….

Using this method will help you make important choices without short-circuiting the process before you’re done. If you’re house hunting, starts by choosing the neighbourhood you like best, then the house style you prefer – split-level, bungalow, or two-storey? And so on and so forth. I know it feels like an oversimplification but it will actually save your sanity. It forces you to prioritize and choose in a manageable decision-tree like fashion.

So what do you think, dearest readers? How do you make your decisions?