Pennsylvania Investment Observer

Variety is the Spice of Life?

by Judy L. Loy

As a majority, Americans are blessed with the ability to afford and live in manner that is unmatched. Even where I live in State College, we can choose from many electronic stores, grocery stores, and can find almost anything we want over the internet. We live in an age of variety and many choices. The belief is that we can make a choice that will make us happy. Yet, what if the very ability to have many choices makes us unhappy? This is a premise of research and of an extremely interesting article by Barry Schwartz called "The Tyranny of Choice,' published in the April 2004 Scientific American. This idea would partly explain why Gross Domestic Product in the U.S. has doubled in the past 30 years but 14 million less people call themselves "very happy."

In research done by Schwartz, he labeled people that do the most comparison shopping as maximizers. Maximizers strive toward a goal of checking all their options. As choices rise, the maximizers' decision-making becomes more difficult, more complicated and takes more time. Even more interesting is after their choice is made, they are nagged by the choices that they didn't have time to check. They also regret not having some of the options that they may have passed by in making their final choice. While maximizers make better objective decisions, they are less happy with their purchase. Call it buyer's remorse.

In addition, in a study by Daniel Kahneman and Amos Tversky, they showed that people respond much more strongly to losses than gains. Whenever someone makes a choice from many options, they are giving up or losing the other options. This can bring about regret. Schwartz found that people with a high sensitivity to regret are less happy, less satisfied with life, less optimistic and more depressed than those with low sensitivity. Maximizers are those people with a high sensitivity to regret. Just remember that, next time you want to comparison shop!

This brings me around to all the choices that you have in investments.

One key blunder is when mutual funds, in particular, want to give people many options. They came up with an alphabet soup called classes of shares. For many years, load mutual funds (those that charge a sales charge) came in one class, which was A or an up-front load. Mutual fund families decided to give investors more choices. Classes of mutual fund shares were created that differ in the way that the investor pays for the fund. Generally, they consist of Class A, Class B, Class C, and Class F (Sadly, there are more but those are the basics). In my experience, most investors find it time consuming enough looking at their investment options, let alone reviewing that Class B can be more expensive than Class A over time because of underlying costs. Of course, that all depends on how long you are in the fund. So did the alphabet soup help investors? No, it made life more complicated for investors and their advisors. Classes of shares have become a regulatory problem. Some advisors were investing clients in fund shares that were more expensive than their alternatives and NASD Regulation took notice.

Do investors want more complication in their investment choices? My guess is no. Most investors that I have run across just want a good solid investment choice, with good solid advice and an advisor that pays attention to them and their investments. Talk about simple!

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